Jacksonville Journal Courier: The face of America’s tax evaders
media mentionby WOLF D. FUHRIG
Tax shelters are investments that reduce a person’s income tax liability. Home ownership, pension plans, and Individual Retirement Accounts may be interpreted as “tax shelters,” as long as funds in them are not taxed and if they are held within the required amount of time.
The Internal Revenue Service recently cracked down on tax shelters that it considered abusive. When the Senate’s Permanent Subcommittee on Investigations looked into devious tax shelters, it discovered that many of them were designed by accountants of large American accounting firms. Examples of U.S. tax shelters include the Foreign Leveraged Investment Program and the Offshore Portfolio Investment Strategy. Both were devised by partners of the nationwide accounting firm KPMG.
A report by the IRS indicated that in 2009, 1,470 Americans with annual incomes of more than $1 million faced an annual net tax liability of zero or even less. In 1998 already, 94 U.S. corporations had a net liability of less than half their full 35 percent corporate tax rate. Among nationally known businesses, Lyondell Chemical, Texaco, Chevron, CSX, Tosco, PepsiCo, Owens & Minor, Pfizer, JP Morgan, Saks, Goodyear, Ryder, Enron, Colgate-Palmolive, Worldcom, Eaton, Weyerhaeuser, General Motors, El Paso Energy, Westpoint Stevens, MedPartners, Phillips Petroleum, McKesson and Northrup Grumman each had net negative tax liabilities.
A study by the Government Accountability Office also determined that, from 1998 to 2005, 55 percent of U.S. companies paid no federal income taxes during at least one year. A 2011 review by Citizens for Tax Justice and the Institute on Taxation and Economic Policy showed that Fortune 500 companies that were profitable from 2008 through 2010 paid an average tax rate of 18.5 percent, but that 30 of these companies actually managed to owe no income tax at all. In 2011, ActionAid reported that 25 percent of the FTSE 100 (a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization) companies avoided taxation by locating their subsidiaries in tax havens. This increased to 98 percent when the stricter U.S. Congress definition of tax havens is used.
Unlike almost all other countries, the U.S. taxes its citizens and permanent residents on their worldwide income, regardless of whether they reside abroad temporarily or permanently. They therefore cannot avoid U.S. taxes simply by emigrating. Forbes magazine reported that some Americans actually chose to give up their citizenship rather than be subject to U.S. taxation. The 2012 limit on the annual amount of foreign income that can be excluded by U.S. taxpayers was $95,100.
The IRS has identified small businesses and sole proprietors as the largest contributors to the tax deficiency between what Americans owe in federal taxes and what the federal government receives. This occurs because there are few ways for the government to know about non-reporting of income without mounting extensive investigations. When tips, second jobs, cash receipts, and income are not reported, it constitutes a law violation subject to criminal prosecution.
The typical tax evader in the United States is a male under the age of 50 in the highest tax bracket and with a complicated return. The most common ways of tax evasion is overstatement of charitable contributions, particularly donations to religious institutions.
In 2010, Congress passed the Foreign Account Tax Compliance Act to improve the enforcement of U.S. taxation in foreign jurisdictions. Switzerland, for example, has a reputation for facilitating tax evasion and Swiss banks agreed to a provisions imposed by the IRS to limit tax evasion in 2011, but only by 2009 did Swiss bank secrecy begin to lift. Whistleblower Bradley Birkenfeld disclosed information which led to the 2009 settlement between the IRS and the Swiss bank UBS, including $780 million in fines and the disclosure of 5,000 potential tax evaders. Birkenfeld himself served prison time for his involvement but also received a $104 million whistleblower award.
The IRS offered tax amnesty under which 38,000 Americans repatriated their holdings in Switzerland and paid back taxes on offshore accounts. Recently some 60 Swiss banks agreed to sign up for a tax declaration program that allowed them to come clean about their American tax-dodging clients, unless they let the Justice Department’s deadline run out.