ataxingmatter

Obama proposes to exempt some IRS spending on enforcement from budget cap

 The 2011 debt ceiling compromise, known as the Budget Control Act, establishes automatic cuts in spending for various categories if no further deal is reached to overturn them. 

In many ways, it might be ideal to allow the Budget Control Act to come into play.  It would force significant reductions in the overall amount allocated to Defense, an area that has fed incessantly on revenues since Reagan's priority on militarization, coupled with Bush II's preemptive wars of choice in Afghanistan and Iraq. We need to cut military spending significantly, and it will not hurt the country's defense to do so.  (It may, however, crimp the high-flying styles of some military contractors.  About time, I'd say.)  Further, the Budget Control Act explicitly protects Social Security and Medicare, so those programs won't be curtailed in the process.  A good thing, again, since it is important for the nation to see that the fearmongering about Social Security as "insolvent" is just that. 

But there's at least one category of spending that an across-the-board cut makes little sense for--the spending necessary to collect tax from deadbeat/scofflaw or criminal taxpayers.  The IRS enforcement budget essentially is an investment in better tax compliance, and returns more dollars to the federal fisc than it takes out. 

Obama has recognized that, and seeks to exempt $277 million of the IRS enforcement spending from the Budget Control Act's cuts.  See the discussion here at OMB Watch (Vol. 13, No. 4, Feb. 22, 2012).

One of the main objectives of President Obama’s fiscal year (FY) 2013 budget request for the Internal Revenue Service (IRS) is to reduce the "tax gap," the difference between what taxpayers owe each year and what they actually pay. The president’s IRS budget request seeks funding increases for both taxpayer services and enforcement programs. Recognizing that a dollar spent on collecting revenue more than pays for itself, the Obama administration has proposed to exclude some IRS enforcement spending from the budget caps imposed by 2011's debt ceiling deal (known as the Budget Control Act). 

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Among the enforcement programs the White House is recommending be increased to raise revenues are:

• An additional $111 million to fight offshore tax evasion, which the IRS estimates will bring in $6.40 for every dollar invested by FY 2015
• An increase of $39 million to improve international businesses’ compliance with the tax code .... The IRS estimates a return on investment of $8.80 per dollar invested
• An additional $129 million to implement recent legislative tax changes, including new reporting requirements and certain provisions of the Affordable Care Act (ACA), which the IRS estimates will bring in $3.50 for every dollar invested
• An increase of $88 million to implement the “Revenue Protection Strategy,” which allows the IRS to adjust a taxpayer's refund if examiners catch errors. The IRS estimates this initiative will return $1.90 per dollar invested as soon as new hires reach their full potential in FY 2015
• An additional $35 million to continue certifying tax preparers, which the IRS estimates will bring in $2.30 for every dollar invested by FY 2015

The IRS estimates that combined, these funding increases will bring in an additional $673 billion in FY 2013 alone, and, by FY 2015, an estimated $1.5 trillion in additional annual revenue.

 Sounds reasonable.  The Bush effort to cut back on IRS funding was a naked gambit for a weakened watchdog that would allow more corporate tax evasion.  Enforcement has paid off considerably over the past two years, as the IRS's effort to unveil offshore bank accounts of US taxpayers has led to significant numbers of taxpayers brining those assets back onto the tax rolls.  Congress should recognize the reasonableness of this request, unless it is so besotted with campaign fever that it is willing to sacrifice sound legislation to ideological obstructionism.

Google, Repatriation and Advanced Pricing Agreements: US, and France, looking into offshoring

Bloomberg reports today that the IRS is auditing Google's offshoring of profits.  See Drucker, IRS Auditing How Google Shifted Profits Offshore to Avoid Taxes, Bloomberg.com (Oct. 13, 2011).

"The agency is bringing more than typical scrutiny to how the company valued software rights and other intellectual property it licensed abroad, said the person, who requested anonymity because the audit isn’t public. The IRS has requested information from Google about its offshore deals after three acquisitions, including its $1.65 billion purchase of YouTube, the person said. The transfer overseas of these kinds of rights rights has enabled Google to attribute earnings to foreign units that pay lower taxes .

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Google, owner of the world’s most popular search engine, has cut its worldwide tax bill by about $1 billion a year using a pair of strategies called the “Double Irish” and “Dutch Sandwich,” which move profits through units in Ireland, the Netherlands and Bermuda. Google reported an effective tax rate of 18.8 percent in the second quarter, less than half the average combined U.S. and state statutory rate of 39.2 percent. " Id.

After being alerted to Google's use of income shifting through media attention to the issue, France is also reviewing Google's income shifting between its French and Irish subsidiaries, according to the Bloomberg article.

This audit, however, takes place against the backdrop of a 2003 "advance pricing agreement"--essentially, a contract between a taxpayer and the IRS that "settles" the tax treatment of a transaction that the taxpayer expects to undertake. 

The IRS has already approved a major part of Google’s strategy. In 2006, the agency signed off on a 2003 intracompany transaction that moved foreign rights to its search technology to an Irish subsidiary managed in Bermuda called Google Ireland Holdings. That deal -- known as a “buy in” in tax parlance -- meant subsequent profit overseas based on those copyrights has been attributed to foreign subsidiaries rather than to Google in the U.S. where the technology was developed.  The IRS approval came in an accord known as an advance pricing agreement. Id.

In my view, advance pricing agreements --a recent introduction in the 'tax compliance' toolkit--are problematic in a democratic tax system.  Only taxpayers with considerable dollars at stake can engage in the process, which allows them to "fix" in advance what their tax obligations are regarding particular business plans.  The potential for agency capture, always present, is enhanced in this setting.  Tax administrators are less adept at foreseeing likely ancillary consequences of a particular decision than the taxpayer itself and, worse, they may be "captured" by their proximity to the taxpayer and lack expertise or in-depth understanding of the issues sufficient to challenge the taxpayer's assumptions.  The decision made ahead of time is likely based on sketchier information than an after-the-fact audit.  Further, those negotiating such agreements may be less inclined to take an strong position vis a vis the taxpayer than those involved in enforcement and litigation decisions later in time would be.  While changes in administration likely affect the government's commitment to, and interest in, both enforcement decisions and advanced pricing agreement decisions, one would expect that an administration that had made a point of being "business-friendly"  would be more likely to enter into taxpayer-favorable advanced pricing agreements whereas one that had a more guarded view of business might be more interested in strong enforcement.

It's worth noting that the big IT and pharmaceutical companies that find it easiest to shift income offshore due to their intellectual property patents are also the ones pushing hardest for a so-called "repatriation tax holiday" on those offshore earnings.  They've kept billions offshore and now want to be able to dole it out in executive bonuses and shareholder buybacks little tax.  They often have the profits go to offshore tax haven countries, so this is income that has very little foreign tax paid on it either.  As I've noted in earlier posts on repatriation (check the category index or just scroll back over the last few months), executives bonuses due to lower tax bills just adds to the outsize compensation those executives receive, while shareholder buybacks just diversifies their portfolios with little likelihood of expansionary impact on the US economy (especially if the diversification results in purchases of emerging market instruments instead of domestic ones).

John Rogers loses his DAD/DAT tax shelter case

John Rogers, formerly a partner at Seyfarth Shaw in Chicago, lost his Tax Court case regarding the Distressed Asset Trust (DAT)/Distressed Asset Debt (DAD) shelters he sold to a hundred clients, for claimed tax deductions of more than $370 million.  See Tax Court Rules Against Chicago Lawyer's Distressed Debt Deals, San Francisco Chronicle, Sept. 1, 2011.  The judge found "no showing of reasonable cause or good faith on Rogers' part" but noted that his tax expertise "should have put him on notice that the tax benefits sought by the form of the transactions would not be forthcoming."

The shelters involved Brazilian consumer debt and were listed as tax avoidance transactions by the IRS in February 2008.  Rogers continued promoting the shelters even after they were listed, and failed to file the appropriate disclosures for listed transactions.  Accordingly, the Justice Department sued in federal court in November 2010 to prevent Rogers from continuing to promote the shelters, and that case is still pending. For information on the Justice Department's claims in the suit, see the release here and complaint here, describing these transactions as violating well-known tax doctrines of economic substance, substance over form, step transaction, and sham partnership.  The release describes the DAT/DAD transactions as follows:

In the DAT scheme, according to the complaint, a foreign business (typically a Brazilian retail company) essentially sells low-value, aged “distressed” debt, such as debt from bad checks, to Sugarloaf Fund, a U.S. entity that Rogers created and controls.   In return Sugarloaf Fund allegedly pays the foreign company 1 to 2 percent of the debt’s face value.   The complaint states that Sugarloaf Fund takes portions of the distressed debt and contributes them to multiple supposed “trusts,” also created and controlled by Rogers.   Rogers then allegedly sells the “trusts” to tax shelter customers for a price pegged to the tax loss to be generated by the shelter.   

 Rogers allegedly tells customers that the Brazilian companies are partners in Sugarloaf, and that the Brazilian companies made genuine partnership contributions to Sugarloaf, rather than sales of debt to Sugarloaf.   These statements are false or fraudulent, the complaint says, because the Brazilian retailers are insulated from any profit or loss, and do not intend to become partners in Sugarloaf.   Rogers also allegedly tells customers that the distressed debt has a value for federal tax purposes equal to its original face value, not what Sugarloaf paid for it, and that customers can take bad debt deductions equal to most or all of the debt’s face value, and can use those deductions to offset unrelated U.S. income. These statements also are false or fraudulent, according to the complaint, because the supposed built-in-losses were never preserved and passed on to the tax shelter customers.

One district court case involved taxpayer Michael Koretsky, for example, in an attempt to quash the IRS summons for Koretsky's appearance after Rogers had provided an affidavit on behalf of Koretsy in the matter, but the court found no grounds to do so.  See Bodensee Fund vs Treasury & IRS (E.D. PA, May 2008) (memorandum opinion and order)  here (describing the taxpayer's participation in two DAD transactions, resulting in claims of $39 million in losses in 2003 and $119 million in losses in 2004).

UBS client loses: information required to be kept on foreign bank accounts can be subpoenaed

The UBS saga continues.  The Ninth Circuit found a Catch-22 for secret account holders in a case,  In re Grand Jury Investigation M.H. v. United States,  No. 11-55712 (9th Cir. Aug. 19, 2011), against a former client of UBS who moved his accounts in June 2010 to another Swiss bank.  The prosecutor, seeking a grand jury indictment, subpoenaed the taxpayer's foreign account records, and the taxpayer claimed Fifth Amendment privilege from revealing information about his foreign accounts.  The three-judge panel nipped that privilege claim in the bud.  There's a law requiring taxpayers to keep records of their foreign accounts--name of bank, number of account, amount in the acount--available for inspection.  Bank Secrecy Act of 1970 (BSA), 31 U.S.C. § 5311.  And that information is required to be reported to the IRS on Form TD F 90-22.1, fondly known as a "FBAR" by tax practitioners advising clients about their offshore reporting obligations.

Information isn't privileged when it is required to be maintained with the purpose of being inspected, said the judges, invoking the 'required records doctrine' originating in a 1948 Supreme Court case, Shapiro v. United States, 335 U.S. 1, 17 (1948) (holding that "the privilege does not extend to records required to be kept as a result of an individual's voluntary participation in a regulated activity").

So the taxpayer is in a pickle.  If he kept the account information as required by law, he must reveal it to the government and it may show that he didn't report as required to the IRS or that he reported falsely.  If he didn't keep the information as required by law, he will have committed a felony in violation of the records law.

One more example of why taxpayers with accounts sequestered in foreign banks had better come forward sooner rather than later.  The UBS deferred prosecution case appears to have been successful in breaking the dam.  The taxpayer in this case (referred to solely as M.H.) turned up in the disclosed information after the IRS agreed to defer prosecution--M.H. had held assets in UBS and then switched them to another Swiss bank account back in 2002. 

The IRS net is spreading--with bankers/advisers as well as US taxpayers who are/were foreign bank customers subject to criminal charges.  See David Voreaos, Ex-UBS Client Must Give Tax Records To Grand Jury, Court Holds, Bloomberg.com (Aug. 23, 2011).

 

California ban on contingency fees

There has been considerable concern about the role of contingency fees as an incentive to tax attorneys to provide advice in support of aggressive or even risky positions on tax returns.  The Treasury has looked at that in the context of the regulations governing practice before the Internal Revenue Service, commonly called "Circular 230" and has restricted the setting in which contingency fees are permissible in tax practice.  Not surprisingly, tax practitioners have argued for loosening of those restrictions, claiming that contingency fees are not problematic in many situations.

California is apparently moving towards a position that is even stronger than the one currently followed in Circular 230.  The California Senate Governance and Finance Committee approved S.B. 342 today on a 5-2 vote and the bill now goes to the Judiciary Committee.  The bill would "ban contingency fees for anyone representing taxpayers in matters involving the Revenue and Taxation Code".  It would also place a cap on attorneys' fees for lawyers in tax litigation and make clear that the provision in the Revenue and Taxation Code is the only remedy for fees in tax litigation, because of a recent attempt by attorneys to claim higher fees under the private attorney general doctrine.

The drafter of the legislation, Sen. Lois Wolk, stated that the ban would address the problem of tax advisers who file "highly aggressive tax refund claims hoping not to get caught in the audit lottery."  BNA Daily Tax RealTime, Apr. 27, 2011 (7:54 pm).  The statement in the bill's text worries in particular about "unregulated tax consultants" , as noted below.

However, sophisticated cottage industries of non-accountant tax consultants have grown considerably in  recent years, offering to amend a taxpayer's previous state income tax returns seeking refunds of previous taxes paid  by claiming tax credits not included on the taxpayer's original return.  Additionally, consultants assist taxpayers protesting an assessor's valuation of his or her property by pursuing appeals seeking to reduce the value with county assessment appeals boards.  In both cases, the taxpayer compensates the consultant as a percentage of the refund, providing a significant incentive to file aggressive claims with questionable justification.   As many of these consultants are neither accountants subject to state law or codes of ethics, nor practitioners covered by Circular 230, they may charge taxpayers contingency fees without any limitation.  Id. at 1-2.

Which is worse--theft of pizza or hiding almost $5 million from the IRS?

In California, I seem to recall, some unlucky (and probably bullying) soul went to jail under the three strikes law for stealing a slice of pizza.

Now, a member of the elite class can file a false tax return to defraud the government (and all honest taxpayers) by hiding $4.9 million in assets in a Swiss bank and not filing tax returns and information reports as required and what does he get ? Possible maximum sentence under the sentencing guidelines was 20 years.  He got: 24 months probation.  the taxes due.  a $940 thousand civil penalty.  (The penalty charge is only 50% of the assets he had hidden in one year--2004, even though it ostensibly could be charged for more years.) And a $10,000 fine.

This guy was clearly engaging in intentional tax evasion.  When the UBS case came to light, he moved a million of his stash to Lichtenstein, hoping to stay ahead of the law.  (Lichtenstein was even better at banking secrecy than the Swiss.) Then he made regular trips back to his Swiss bank to take out bunches of travelers' checks, trying to empty out his account. 

The case is United States v. Vogliano, S.D.N.Y., No. 10 Cr. 327 (sentencing 4/21/11).  You can read the plea agreement here  Download Vogliano SDNY No. 10-cr-327. 122210 plea agreement.

Will the lack of jail time make all those scofflaws who had gotten worried about their tax information coming to light in the UBS case decide it isn't worth worrying about?  Probation, after all, is just checking in with someone to show you're still around.  They're probably living in their multimillion dollar townhouse, so what's not to like.  These days, the "greed is good" crowd doesn't seem to have much shame.  He'll end up paying about a fifth of the assets he had socked away, though.  That's something.

cutting the millionaires' taxes & making the rest work longer/harder and pay more isn't "shared sacrifice"

E.J. Dionne's op-ed is worth reading--The Tea Party is Winning, Washington Post, Feb. 21, 2011.

Look at the states, where GOP governors are using deficits caused by long-term tax cuts and low taxes that didn't raise enough money to pay their pension obligations that they could easily have funded to now benefit (again) big business and the wealthy.  The wealthy double-dip and the poor, the middle class, and those faithful government employees who put in years of labor with the expectation of at least getting their promised pensions at the end get shafted.  Instead of raising taxes equitably and cutting only those programs that are dross, the governors are on a union-busting program.  Why bust unions?  Because if the average worker at the average private job ever realizes that unions are the way to get a fair shake from their employer, the wealthy managers and owners of the big corporations will have to share some of their filthy lucre gotten from the increased productivity with their workers in the form of wages and benefits.  Why, private workers might even find they should form an alliance with public employees, who already understand the importance of unions allowing them to have some collective power in respect of their employer.  Gotta stop that, says the GOP mindset.

Look at the federal government, where the same Republicans insisted that deficits don't matter when they were passing huge tax cuts for the wealthy and big business and and insisted that the poor didn't need the "making work pay credit" .  The wealthy and big business double dipped--low taxes, great benefits, while the poor sacrificed.  Now these same Republicans are now insisting on cutting out anything in the budget that benefits the middle class or poor--or puts any obstacles in the wealthy class's and big business's  rapacious exploitation through casino speculation.   Picking an arbitrary number that just happens to amount to huge proportions of the piddling amounts we spend on Head Start, pollution control, tax enforcement, and programs for the needy, the GOP is aiming to cut cut cut.  But at the same time, all those things that benefit the wealthy are off the table.  Regulation of pollutants or of drilling?  Gotta stop it.  It might prevent those who own most of the financial assets from making exploitative profits from natural resources.  Enforcement against tax cheats?  Gotta stop it by cutting funding for tax collection efforts against wealthy tax cheats (again--as the GOP has done whenever it is in control).  Making big corporations like GE (effective tax rate less than 15%)  and Yahoo (effective tax rate less than 10%)  pay their fair share of taxes to support the legal, patent, transportation, communication and tax subsidies that have made their businesses wealthy by preventing their transfer pricing and leverage games?  Gotta put an end to any such thinking, the GOP apparently believes, or its favored MNEs will have to return to paying taxes equal to a much bigger share of the GNP. 

This country succeeded in the post-war years with very high taxes and significant expansion of government because it supported programs that spread growth broadly and allowed the formerly impoverished to share in the growth.  Now we are moving against our core principles, creating an oligarchy whose GOP minions will see to it that government exists as a tool by for and of the wealthy and the big corporations.  That future may suit Ayn Rand, who basically viewed anyone who got wealthy (whatever the means--though she claimed it was based on 'merit') as a "good guy" and everybody else just fodder for their exploitation. 

It is true that our history is riddled with ruthless men who exploited anyone in their path to wealth.  The railroad barons of the mid 19th century come to mind--they set up separate corporations to receive the largess from the federal government and avoid paying the workers that they exploited (treating Chinese immigrants as expendable cogs in their money-making machine).  Those who set up mines on government lands--and under the 1872 mining act pay no royalties whatsoever to the American people for the wealth they extract from OUR lands--similarly exploited their workers, doing as little as possible for safety.  At every stage, titans of commerce make their fortunes by exploiting workers and passing off to the public as externalities the harms of their commerce--oil spills, water pollution, air pollution, destruction of natural habitats, chemical toxins in lakes and land, abandoned megastores,  abandoned factory shells, union busting that leaves workers with a pittance while the privileged CEO class wines and dines on the productivity of the worker, shadow banks that buy up productive firms (often with leveraged buyouts using the firms own profits to pay for their acquisition), fire workers and move the company offshore or split up and sell its assets to reap a quick profit, damn the workers;  mortgage mills that swindle unsuspecting borrowers and then swindle unsuspecting investors; bankers willing to reap casino gambling profits (often from insider knowledge of their clients' plans or from knowingly hawking risky products) with no concern for the integrity of the system. 

These things are inherent in unregulated "casino" capitalism--it is a brute force that favors oligarchy and plutocracy, greed and rapacious excesses, destruction of the environment and exploitation of ordinary people.  In a democracy it demands to be controlled by the people so that the excesses are limited, and the nation's resources--waters, land, air, workers and human capital--are protected.

At this point, the GOP is assisting in the rape. There is enough excess in the military expenditures to account for every penny that they want to cut from needed human capital and physical infrastructure programs.  They just don't want to go there.  And the Democrats are not stopping the pillage.

More on Tax Information Reporting by Third Parties

On Wednesday, the Senate waived a budget point of order against, and thus effectively passed on an 81-17 vote, an amendment (S. Amdt. 9) to the Federal Aviation Administration reauthorization act (S. 223) that would repeal the 1099 reporting requirements added by the health care reform law (P.L. 111-148) that mandates reporting of payments totaling $600 or more in a year to a single vendor.

This provision was put in the bill as a revenue raiser, because third-party reporting prevents "under the table" payments and non-inclusion of income on tax returns.  So the Republicans and Democrats in the Senate (this version of the amendment was introduced by Michigan's own Debbie Stabenow) have proven yet again that they are not serious about getting rid of the deficit in ways that can be done without causing real economic havoc to ordinary people who are just scraping by.  Instead, they kowtow to the National Association of Manufacturers and all of the other lobbying groups representing businesses that are willing to let tax cheats continue to hide away their income and leave the greater share of the tax burden to those who comply with their obligations.

Carl Levin at least recognizes that repeal of this reporting provision will mean less of the taxes due coming into the Treasury.  He proposed an amendment (S. Amdt. 28) that would have paid for the repeal with other revenue raisers--including the repeal of the ridiculous "domestic manufacturing" deduction under section 199 for oil and gas production and changes to the foreign tax credit applicable to dual capacity taxpayers.  You'd think the Senate would have been eager to pass a revenue-neutral version of the bill, wouldn't you, after all the hollering about how the government "must" reduce Social Security and other "entitlements" because there simply isn't enough money?  But the Senate voted against the paid-for repeal, 44-54. 

I'm more and more convinced that it is not the deficit that the Republicans hollering for "entitlement reform" care about--it is that they just simply want to destroy all of the things that the New Deal did to provide a safety net for ordinary people, while making sure that they reinstate brute-force capitalism like existed in the 1920s, back when Teddy Roosevelt made his famous statement about the corporate titans and malefactors of great wealth.

At least the Senate voted down Mitch McConnell's attempt to repeal the health care overhaul, which he also offered as an amendment to the FAA reauthorization bill.  The defeat came on a vote of 47-51 on a point of order, since repeal would cost us more than $1 trillion in the decade after 2019.

Tax information reporting by third parties

As the extraordinarily conservative Republicans in the House (and in the Senate) press to turn back progressive initiatives, the White House and responsible Democrats (assuming there are a few) need to be cautious that they don't concede before they even try to fight and end up dumping out important provisions to appease the right like they did with the "public option" in health care reform.

For example, Obama made a point in his State of the Union address of going along with the demand by small businesses for alteration of the 1099 reporting provision enacted as part of the Health Care Reform bill.  See, e.g., Lavante, What President Obama Really Said in the State of the Union Address about 1099 Reporting (Jan. 2011).  Businesses complain about any new reporting requirement.  First, because they don't want to do any reporting at all if they can get out of it.  Second, because they know that information reporting has a huge impact on the ability of small businesses generally to evade taxes by simply failing to report income.  Compliant businesses ought of course to support reporting requirements, since they end up paying their taxes in full, while the noncompliant businesses that earn income "under the table" are the ones that benefit when there is no reporting requirement. 

Think about this a minute.  Businesses inevitably track their invoices and their customers.  They know who pays and who doesn't.  They know what they've bought and who they've bought it from.  It doesn't require much to file that information (already maintained by most modern businesses on computerized accounting programs) in the appropriate forms so that the IRS has the information to match against what various business vendores report as their income.  This should therefore be a nonissue:  for a small additional cost in the time to do the paperwork, the government will be able to hold businesses accountable in the same way that it holds ordinary wageearners accountable--through the information reports filed by third parties.  

Raising the threshold on the amount for reporting or excluding all "small" businesses from reporting would be a bad idea.  Small businesses are the place where failure to report income likely adds up because of the ease with which such things can be obscured without third party reporting, whereas large companies have various audit and public reporting requirements that would hinder such failures to report: one has to think that it is a number of those family-owned businesses running sole proprietorships and S Corporations that are evading their responsibility to report their income and causing all of us to have to bear a disproportionate amount of the burden.

Of course, this is a broad issue that relates to reporting by third parties in many different situations.  With third-party reporting, the tax gap--somewhere in the range of $200 to $300 billion annually made up of taxes evaded by cheaters--would be significantly reduced, and compliant taxpayers would be restored to equity.  Noncompliant taxpayers would no longer garner a tax advantage from simply failing to report their income on the assumption that the IRS would have considerable difficulty figuring out the additional payments they've received.  It is a no-brainer, given the way that third party reporting assists in overcoming the problems of assymetry of information faced by the government.  See, e.g., United States Government Accountability Office Report to the Committee on Finance, U.S. Senate, "Tax Administration: Costs and Uses of Third-Party Information Returns," GAO-08-266, Nov. 2007 (noted in Citizens for Tax Justice report cited below).   But neither the Republicans nor the Democrats seem to be able to see past the hullabaloo raised by people (presumably including a good many of those who profit from the lack of third-party reporting) about "burdensome" reporting.

There are similar complaints about the IRS's proposed regulations requiring banks to report interest paid to foreign accountholders in the same way that they have been reporting such interest for domestic accountholders for some time, in order to be able to comply with our information reporting requirements under treaties.  Citizens for Tax Justice notes that the so-called "center for freedom and prosperity" (hereinafter CFP) (often represented by Dan Mitchell of the Cato Institute) has as usual distorted and misrepresented the issue here.  See The Tax Cheaters' Lobby is Wrong about IRS Proposed Regulations, CTJ, Jan. 31, 2011.  Not only do we have a responsibility to provide information to other governments under our agreements on tax information exchange, but such reporting will likely aid in the ongoing battle to catch flagrant tax cheats who hide as foreigners to avoid paying income tax on earned interest, as CTJ notes.   

(Again, one suspects that these are some of the same people who hide money in offshore secret banking jurisdictions and conveniently forget to report the income on it on their tax return.  At the recent ABA tax section meeting in Florida, I spoke with a lawyer whose practice includes representation of many of these tax shirks.  He estimates that there are more than 250,000 such shirks with "substantial" amounts socked away in offshore tax havens.  The right-wing CFP, of course, gathers money from these rich folks and spends it vilifying the efforts to squelch tax havens and tax competition, which it considers a wonderful thing because it permits the extraordinarily wealthy to hang onto "their" property (i.e., avoid contributing taxes to pay for the government that made that property possible).  Don't believe anything you read on the "prosperity" center's site--it will almost certainly be distorted by misleading innuendo and misinformation.  The CTJ report is an excellent takedown of the many exaggerated and misleading claims made in the "prosperity" center's materials.  You can also find a number of my own website where I have reviewed some of their videos and found them to rest on a very shaky foundation of speculation and conclusory assertions.)

The Dodd-Frank financial reform bill included a similar new reporting requirement for broker-dealers.  Some experts have concluded that about 25% of those who report capital gains from sales (in most cases, the most affluent amongst us who are making trades in financial assets such as stocks and bonds) have cheated by overreporting basis and thus underreporting gains.  That adds up to a huge part of the tax gap.  Dodd-Frank raised some revenues by requiring brokers to report basis, providing a third party check against an individual's claimed basis amount.  The banks have this information automatically when they conduct trades on stocks or bonds they've sold to the investor and they are gearing up for the initiation of this reporting this year.  See Larry Barrett, Broker-Dealers Brace for Cost Basis Reporting, Security Monitor, Feb. 2, 2011. 

Of course, in enacting the provision, Congress provided much too much flexibility to investors selling financial assets, by allowing them to specifically identify which of completely fungible items they sell (thus cherry picking the basis that gives them the lowest tax liability).  If average basis isn't used (and this is an area of considerable complexity regarding the appropriate rule), then there should be a first in-first out rule that requires investors to be treated as selling their oldest acquired items first.  It is hard to see any justification for allowing cherrypicking that has nothing but a tax-minimization goal as its object--these are fungible financial assets that are exactly the same for every purpose other than tax, so recognizing the tax differences as a basis for a tax beneficial election makes no policy sense at all.  The identification provision that has been in the Code for a long time should be deleted, and owners of financial assets should not be able to specfically identify consideration received for such items in any context, whether reorganizations (where the Bush Treasury instituted a rule permitting such identification in 2006, claiming wrongly that it was a necessary corollary to their decision to treat a share of stock as the base unit of property in reorgs) or otherwise.

Meanwhile, other provisions in the Dodd-Frank reforms, limited though they were, now face a struggle against a headwind of Republican cost-cutting and business-friendly attitudes.  The SEC seems to be suggesting that it thinks it will have to rely on the banks' own self-regulatory apparatus--i.e., it appears to be willing to let the fox watch the henhouse when it comes to the Dodd-Frank fiduciary standard.  And the CFTC sees itself needing considerably more resources in order to institute the swaps exchange which is essential to the re-regulation of the swaps market that lay at  the heart of the financial speculation carried on by TBTF banks.  See Dodd-Frank Tax Battle Coming, Securities Monitor, Feb. 2, 2011.  Too many in the new Congress seem to think that the tea party crazies represent the majority of American voters, and are planning a range of truly stupid actions, from failing to approve a new debt ceiling (this, of course, after fighting singlemindedly for hundreds of billions of tax cuts for the extraordinarily wealthy) to failing to fund the regulatory apparatus necessary to give us any hope that 21st century global capitalism can be responsive to democratic, people-centered objectives for society.

Tax Preparer --old abuses, new procedures

The days of just anyone becoming a tax return preparer and playing havoc with the rules, as some have, seem to be winding down.

The courts, for one, are now taking fairly strong action against tax return preparers who actively assist clients in tax evasion schemes.  See, e.g.,  US v. Sommerstedt et al, 106 AFTR2d 2010-5403 (DC NV 2010), available with other case materials on justia.com, here.  A tax return preparer who was permanently enjoyined from acting as a return preparer or promoting tax evasion schemes had been required to notify clients of the injunction against him and to file a certification that he had done so.  He filed for relief from notification and certification, claiming that it violated his Fifth Amendment rights.  The court rejected that claim, indicating that he was not being ordered to make a testimonial statement but merely inform clients of an injunction against him that was a matter of public record.  Until he files, he'll be fined $1000 a day for contempt of court.  That should mean that the preparer's days of profiting from promoting tax evasion are over.

Similarly, the IRS Is moving ahead with the oversight rules for requiring "preparer tax identification numbers" (PTINs) for all preparers on federal returns starting Jan. 1.  The rules cover anyone who is paid to prepare all or substantially all of a return or claim for refund.  125,000 notification letters are slated to go out weekly for the next eight weeks to remind preparers who already have PTINs that they will be required to sign up under the new system.   The new PTIN sign-up application, with a fee of $64.25 due, is  available through www.IRS.gov/taxpros.  See IR-2010-106  and the PTIN page  and Overview for more information.  (By the way, for taxpayers with concerns about how to choose a tax preparer, the IRS provides a "tipsheet" that may be of interest and also provides information on "complaints against tax professionals".)

There has been the typical clamor about burdensome new regulations connected with the new PTIN, testing and registration requirements.  See, e.g., AICPA VP testimony at IRS hearing on changes needed, Oct. 8, 2010 (comments on the proposed regulations, in particular objecting to registration and testing for nonsigning staff of CPA firms and student interns); VSCPA expressing concerns regarding IRS proposal to regulate paid income tax return preparers, Virginia Soc. of CPAs, July 10, 2010;  ; Members of Congress Ask Treasury to Modify Return Preparer Registration Plans, J. of Acc'tancy, Aug. 11, 2010 (indicating, surprisingly,  that some congressmen don't think the need for testing has been demonstrated).  Some of these concerns do call for practical remedies--testing and registration for student interns, for example, could well be difficult.  Some appear to reflect typical knee-jerk reactions to any new regulation that can be claimed to be burdensome--in particular, the congressional letter questioning the need for testing seems highly questionable, since there are demonstrable problems with lack of competency.  For some evidence of the type of errors committed, see "Top Errors for Taxpayers and Paid Preparers on Return Submissions" at the IRS website. 

The IRS has responded to various of these complaints in different ways.   Rev. Proc. 2010-41 provides some relief for foreign tax preparers and those without a Social Security number vecause of conscientious religious objections.  At an AICPA fall meeting, Commissioner Shulman announced that there would likely be "some relief for testing and continuing education requirements for people who do not sign a return and work in a professional firm under the supervision of an accountant, enrolled agent or lawyer."  Text of AICPA keynote address.   To address further concerns about the new requirements, Commissioner Shulman announced today the creation of an IRS Return Preparer Office to have "broad responsibility" over the initiative, with David R. Williams as head. Download Shulman ann. of Williams to head tax return preparer office.102610.