Offshore Tax Evasion – Panama Papers Update

June 26, 2017  |   Posted by :   |   Tax Evasion   |   0 Comments

A recent study based on the Panama Papers and HSBC Swiss Bank Private Bank public information leaks verify that the superrich evade nearly 1/3 of their taxes due (See Guardian 6/1/17 article, “Super rich evade nearly 1/3 of their tax due”).

The study was lead by researchers at the Norwegian University of Life Sciences and the University of Copenhagen, which studied wealth statistics in Norway, Sweden and Denmark (where detailed records of personal wealth are available). The study found that similar or higher level of tax evasion were to be found among the super rich in other countries. Examples cited included: Latin America, Europe and Asia where there is more offshore wealth ownership than Norway (& other countries studied).

The Study’s findings confirm that the top .01% of the world’s wealthiest people who own 50% of the world’s wealth use offshore tax havens to hide their wealth (i.e. those who have assets over 31 million pounds or nearly $40m US).

The political and economic ramifications of this pervasive worldwide tax cheating by the Super-rich worldwide can be seen in many countries where the populace lives on $2 per day, where the schools, hospitals, roads, bridges, ports are either non-existent or crumbling, where health care is in short supply so pervasive disease, health issues and suffering are massive.

The career politicians and the respective taxing agencies turn a” blind eye” and allow the proliferation of tax cheating which bankrupts entire cities (see Detroit, Michigan, numerous cities in California and other places), states (the State of Illinois is virtually bankrupt), and countries Greece’s financial fiasco is the direct result of a reported 89% of their taxes due being uncollected.

Without tax revenues, governments cannot fund needed social services. Crime rises. Criminals are enriched. Even in the United States which has the Internal Revenue Service the world’s leading and pre-eminent taxing authority the Super-rich have made a mockery of taxes.

Estimates in the US are that up to 10m US taxpayers have undisclosed offshore accounts involving trillions of dollars in assets held secretly in the 80 world wide tax havens lead by Switzerland and the United Kingdom territories and crown dependencies. According to published studies, the United States/ State & Local Governments are out $184 B per year in tax revenues as the Super-rich hide their assets offshore, do not report their income while bankrupting US states and cities, underfunding US pensions and destroying the US safety net of health, education and transportation. While less than 1% of these taxpayers live in $25m+ homes, drive $3m cars (see new Bugatti car), travel on their privately owned jets and take cruises on their giant yachts the rest of America pays the Bill.

Who invented these rules? How can the Super-rich cheat on their taxes and get away with these tax crimes?

In the US not paying taxes due on undisclosed assets and unreported income subjects “Tax Cheats” to criminal prosecution for 4 separate felonies for tax crimes: willful evasion of tax, obstruction of tax collection, conspiracy to commit tax evasion (if done in tandem with another party, and filing false income tax returns by failing to report their income. These 4 tax crimes have statutory punishment of up to 16 years in jail.

If the Tax Cheats use their tax evasion proceeds to buy assets it is then designated as money laundering. If they use mail or wire transfer as a result of the asset purchase (which may include telephone calls, checks, wire transfers or related correspondence) each of these are separate felonies with 20-year jail sentences.

Since 2006 when Senator Carl Levin introduced the Stop Tax Haven Abuse Act the US Congress has known that nearly $200B per year in taxes due goes uncollected. Over the last 11 years nearly $2 Trillion in taxes have been uncollected. The IRS has responded with three separate offshore voluntary disclosure programs commencing in 2009.

In the last 8 years, as of 2017, the IRS has collected $9.9B from 55,800 taxpayers. Less than 1% of those cheating on their taxes have been held to account for their tax crimes. Nearly $2 Trillion in federal/state/local tax is missing from affected governments.

If this what the IRS calls success, how do they define failure?

The world wide tax system is clearly broken, it is up to all global taxpayers to demand that their elected officials do what is necessary to fix it or it will stay broken at which point everyone loses except those criminals who successfully cheat on their taxes.

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Offshore Tax Evasion and the City of London (UK)

June 19, 2017  |   Posted by :   |   Tax Evasion   |   0 Comments

In an explosive article for the UK Independent, author Paul Holden poses a rhetorical question, “David Cameron vowed to crack down on offshore tax evasion so why has it disappeared from the Tory Manifesto?”

Previously in 2016, Italian Mafia expert and author Roberto Saviana labeled the UK “the world’s most corrupt country” citing the vast sums of “dirty money” that flow into London via the British territories and crown dependencies which are non-transparent tax havens.

In the City of London (the financial center of London) a vast interconnected cluster of bankers, lawyers, accountants and advisors get paid huge sums of money to facilitate tax cheating by hiding funds for the super-rich as evidenced by disclosures on the Panama Papers and the Swiss Leaks. These tax-cheating professionals have created a cottage industry for their criminal tax evasion pursuits and are the “Enablers” of the tax crimes and money laundering which has the City of London at their epicenter. The Tax Justice Network has cited them as the biggest threat to financial transparency.

In 2016 the OECD estimated that $240B per year in tax revenue is lost annually due to worldwide tax cheating. Separate US estimates are that $184B per year in Federal/State/Local taxes are lost annually to offshore tax evasion. US taxpayers who illegally do not declare assets held offshore or income from those assets are distinguished from US multi-national corporations who, under existing US tax law, do not have to pay tax on offshore profits until the funds are repatriated to the US. This inconsistency in US tax law smacks of both lack of patriotism and general unfairness to all those patriotic Americans who faithfully pay their taxes annually.

In 2012, the Tax Justice Network estimated that between $21 Trillion – $32 Trillion is held as private wealth for super-rich individuals worldwide in 80 worldwide tax havens. The UK is at the head of the list sponsoring numerous worldwide tax havens holding trillions of dollars in financial wealth. Offshore tax evasion for the super rich does not yet account for the proceeds from the offshore tax evasion which are used to “launder” these criminal illicit funds and are used to purchase worldwide real estate, art, yachts, private jets, jewelry and gold bullion.

The corruption of the super rich, the failure of elected officials or taxing authorities to seriously pursue these tax and other crimes has led to a world wide network of less than 1% of the population controlling the vast world wealth. Russian oligarchs, Saudi princes, corrupt politicians, dictators, despots, drug dealers, arms traffickers, sex slavery trade all benefit and get to keep their ill gotten gains. They live the life of wealth and ostentatious exhibitionism while driving around in their $2m cars, from their $25m+ homes to go and board their private jets and boats. Simply put, the worldwide tax system is a “rigged game” where the super rich cheat on their taxes, launder their tax evasion proceeds into expensive assets and get away with it.

As the bank robber, Willie Sutton once replied when asked why he robbed banks stated, “that’s where the money is”. The superrich do not rob banks, they rob national treasuries. In the 2005 US Supreme Court Case Pasquantino, the Court analogized those who do not pay their taxes as embezzling funds from their national (or state) treasury.

IRS/2009-2012 Offshore Voluntary Disclosure Program

Since 2009, the IRS has established 3 different Offshore Voluntary Disclosure Programs (most recent version implemented in 2012 and significantly modified in 2014). In 2017, the IRS has reported that to date (8 years later) the IRS has received 55,800 taxpayer disclosures of unreported offshore accounts/income and has collected $9.9B in tax, interest and penalties.

While the United States has annually nearly $200B in lost federal, state and local tax revenue from the tax cheating done by the super rich (facilitated and enabled by their legion of advisors), since 2009 the IRS paltry collection efforts has netted less than $10B from less than 60,000 US taxpayers despite 3 separate Offshore Voluntary Disclosure Programs implemented by the IRS since 2009. While the IRS estimates there may be up to 10 million US taxpayers with undisclosed offshore accounts, they have not even found 1% of these taxpayers.

In the UK territories the British Virgin Islands named in the Panama Papers, a small island in the Caribbean with 28,000 population, since the 1980’s, when they legislated account secrecy laws, has created over 1m companies (with no disclosure of the actual owners) of which 479,000 are still in existence. Over ½ of the thousands of companies set up by disgraced Panama Papers law firm Mossack Fonseca were in the BVI.

The social, political and tax ramifications of this entirely corrupt worldwide system depends on the secrecy of the tax havens, and the expertise of lawyers, accountants and bankers who facilitate these crimes. The sad truth is: they are bankrupting their own countries.

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The IRS and Married Couples: Real Estate

June 15, 2017  |   Posted by :   |   International Tax Planning,IRS Tax Audits   |   0 Comments

Two new cases in 2017 have been recently decided by the US Tax Court, which involves married couples with Real Estate:

1. Asad, TC Memo. 2017-8: Husband & Wife who each owned rental property deducted large losses on their joint tax returns. They later divorced. As per the divorce agreement, the divorced couple wanted to split the taxes 50/50. The IRS successfully argued at trial that under the joint tax returns each spouse was jointly and severally liable for the taxes owed. The Tax Court ruled in favor of the IRS holding that the tax allocations set forth in the divorce agreement do not control the couple’s liabilities to the IRS.

Under Asad, the key issue is that the spouses filed joint income tax returns and therefore were jointly and severally liable for all taxes due. They each individually owed 100% of the taxes due and could not contract between each other to pro-rate the taxes on a 50/50 basis. In addition, the divorce decree did not supersede the IRS legal right to pursue collection against for both spouses for 100% of the taxes due, so if one spouse did not pay their share of the taxes due (50%), the other spouse could be obliged to pay the full 100% of the taxes due.

For married couples, the Asad is an example of the dangers in filing joint income tax returns which would not have been the case (for collection purposes) if the spouses had filed married filing separate tax returns in which case they would have been held liable for only the taxes due under their filed tax return.

2. Nielsen, TC Summ. Op. 2017-31: a couple who owned several rentals incorrectly included the cost basis of the land and the buildings in the computation of the depreciable basis (which is not allowed since land is non-depreciable). During the IRS audit, the IRS relied on county assessments to figure the cost apportionment between the value of the land and improvements and the Tax Court sided with the IRS stating their allocation was reasonable.

Taxpayers, who buy real estate, should specify in the contract of sale the total purchase price and how much is allocated for the building and for the raw land. The contract of sale then becomes their evidence of the depreciable basis of the property (i.e. Building not land). The Taxpayers should maintain copies of the contracts for the original acquisition and then use it for any future sale tax planning. Building depreciation is subject to recapture as ordinary income. Capital gains tax is recalculated at ordinary income tax rates to the extent of recapture of prior depreciation deductions and taxed as ordinary income. Since long-term capital gains tax rates are 20% and ordinary income tax rates are 39.6% (maximum federal tax rates) this tax planning is essential to minimize tax due on sale of real estate.

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IRS, Celebrities and Taxes

June 14, 2017  |   Posted by :   |   IRS Tax Audits   |   0 Comments

Celebrities though famous (and adulated by fans) like the rest of the US taxpayers must pay their taxes timely or have IRS tax problems. Whether due to an adverse audit result or failures to pay taxes due, American legends like Willie Nelson once had his entire estate seized by the IRS for his advisor’s failure to timely pay his payroll taxes due.

Current litigation between Johnny Depp and his business managers revealed the star actor has paid millions of dollars to the IRS in penalties and interest for not timely paying his income taxes.

How do the rich and famous celebrities become targets for IRS tax collection? Their high public profile makes them targets for publicity. So if they live the “high life” (i.e. expensive mansions, autos, jewelry aka the “Bling Life”) they fly right into the IRS radar. When they don’t pay their taxes due, the IRS swoops in and seizes their assets, liquidates them at reduced value and then pays off their taxes, penalties and interest due often destroying their entire estate (as happened to Willie Nelson).

For those unaware of the power of the IRS consider their annual budget (over $10B), their personnel (nearly 100,000) and their power (they collect over 3 trillion dollars in taxes yearly). When the US government could not incarcerate Al Capone, the IRS audited him and held him liable for unreported income (which is criminal tax evasion) and put him in jail for 10 years (and did the same to LA based mobster, Mickey Cohen).

In 2017, stories abound of celebrities in the film and music business with massive tax problems:

1) Legendary Singer Dionne Warwick owes the IRS over $10m

2) Comedian Chris Tucker owes the IRS over $12m

3) Musician R. Kelly owes the IRS over $6m

4) Singer Mary J. Blige owes the IRS over $3.4m

5) Singer Lionel Richie owes the IRS over $1m.

So despite fame, fortune and magnificent success these examples of celebrities with tax problems make it crystal clear when dealing with the IRS, you may run but you cannot hide.

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IRS Tax Audits: Taxpayer Good Faith Misinterpretation of the Law

June 05, 2017  |   Posted by :   |   IRS Tax Audits   |   0 Comments

Under the case, Mortensen v. Commr. 440 F.3d 375, 385 (6th Cir. 2006), it was held that reasonable minds could differ over tax reporting. In the US Supreme Court case of United States v. Bishop, 412 US 346, 360, 36 L.Ed. 2d 941, 93 S.Ct. 2009 (1973) the Supreme Court stated:

“In our complex tax system, uncertainty often arises among taxpayers who earnestly wish to follow the law… It is not the purpose of the law to penalize frank difference of opinion or innocent errors made despite the exercise of reasonable care”. 412 US at 360-361. See: Spies v. United States 317 US 492, 496, 87 L.Ed 418, 63 S.Ct. 364 (1943).

In the Mortensen, Bishop and Spies cases the United States complex system of tax law was held by the Courts to be a reasonable basis for a good faith misinterpretation of a taxpayer’s legal duties in the wrong application of the tax law. The essence of the Courts’ rulings was that a misunderstanding or lack of knowledge of the law or facts militates against a finding of willfulness.

There is a long line of cases in the United States that side with the taxpayer for a good faith misunderstanding of the law. It has been held that “Willfulness” is a voluntary, intentional violation of a known legal duty. A good faith misunderstanding of the law, whether or not objectively reasonable, negates willfulness. See: Cheek v. United States 498 US 192, 200-202, 112 L. Ed. 2d 617, 11 S. Ct. 604 (1991); United States v. Bishop (cited above), United States v. Pensyl 387 F. 3d 456, 458-460 (6th Cir. 2004).

The complexities of the Internal Revenue Code and the massive case law interpreting the Code (along with the US Treasury Regulations, Revenue Rulings et al) result in the understanding that the complexities involved in the interpretation of the relevant tax laws may subject the taxpayer to a misinterpretation of the tax law. As these cases hold a taxpayer is not required to be perfect for this would be an unrealistic expectation. Even tax specialists cannot be expected to be perfect.

As stated in the Mortensen case, reasonable minds can differ over tax reporting. The US Congress was concerned that taxpayers would participate in the audit lottery (ie. the risks of being audited) and take questionable positions on their tax returns in hopes of not being audited. H.R. REP. No.101-247, 1388 (1989). H.R. Rep. No. 101-247, as reprinted in 1989 U.S.C.C.A.N. 1906, 2858.

Congress legislation requires that taxpayers have an obligation to submit tax returns that reflect correct amounts of income. IRC Sec. 6662 imposes a penalty for substantial understatement of income (See IRC 6662 (b). However, the relevant statutes provide for several defenses to penalties including “reasonable cause” and “good faith defense” (see IRC 6664 (c)

Treasury Regulation 1.6664-4(b) (1) provided clarification on reasonable cause and good faith, which states “the most important factor is the taxpayer’s effort to assess the taxpayer’s proper tax liability”. In addition, Courts take into account all the relevant facts and circumstances to make a determination of “reasonable cause” and “good faith” such as the taxpayer’s experience, knowledge, sophistication, and education and whether the taxpayer relied on a tax professional.

The key issue is whether the taxpayer made an effort to assess their proper tax liability. So if the taxpayer made a mistake in their interpretation of the tax law but made “an effort” to assess their proper tax liability for example by engaging a qualified tax advisor who is an expert on federal tax law (e.g. a tax attorney) and then relied on the professional tax advisor (i.e. tax attorney) in the preparation and filing of the relevant tax return to report the income the taxpayer may then satisfy the “reasonable cause” and “good faith” exception because the taxpayer believed that the tax professional had knowledge in the relevant areas of the tax law. (See: United States v. Boyle 469 U.S. 241, 251 (1985).

Under Boyle the US Supreme Court held that a taxpayer is entitled to rely on the advice of a tax attorney since “it is unrealistic for taxpayers to recognize errors in the substantive advice of an attorney.” In addition Boyle stated: “ to require the taxpayer to challenge the attorney would nullify the purpose of seeking the advice of a presumed expert in the first place”.

So how does the taxpayer establish reasonable cause and a good faith effort? The taxpayer who recognizes the limitations of their tax expertise and decides to engage a competent tax attorney as an expert to guide them may then prove “reasonable cause” in the tax positions they take on their tax returns. Generally, reliance on a tax advisor may be considered reasonable when the taxpayer knew that the tax advisor possessed specialized knowledge in the relevant aspects of federal tax law (Treasury Reg. 1.6664-4(b)(1).

In the case Stanford v. Commr 152 F.3d 450 (5th Cir. 1998) the court held that “many intelligent investors hire independent experts to advise them particularly with respect to arcane matters of tax law”. The key issue is whether the taxpayer understood the tax law. If not, they hired a skilled tax attorney who was well versed in the “arcane area of tax law” and then relied on the tax attorney’s advice.

Case law has set forth a 3 prong approach to prove reasonable cause (especially where the taxpayer is asserting a defense against penalties under IRC Sec. 6662 which imposes a penalty for substantial understatements of income, among other penalties imposed for negligence, substantial valuation misstatements, and a variety of other types of understatements of income or overstatements of liabilities (IRC 6662 (b).

The case law 3 prong approach to prove reasonable cause requires the taxpayer to demonstrate the following:

1. The Advisor was a competent professional who had sufficient expertise to justify reliance;

2. The taxpayer provided necessary and accurate information to the advisor;

3. The taxpayer actually relied in good faith on the advisor’s judgment

See Sklar, Greenstein & Scheer, P.C. v. Commr. 113 T.C. 135, 144-145 (1999) citing Ellwest Stereo Theatres of Memphis,Inc. v. Commr, T.C.M. 1995-610.

Generally, reliance on a tax expert (i.e. tax attorney) may be considered reasonable when the taxpayer knew that the tax advisor possessed specialized knowledge in the relevant aspects of the Federal tax law. In the case of Neonatology, P.A. v Commr. Taxpayer reliance on an insurance agent was found to be unreasonable because the insurance agent was not a tax professional and the taxpayers were sophisticated and should have known that the tax benefits discussed were “too good to be true”. See Neonatology 115 T.C. 43, 99 (2000) affirmed 299 F.3d 211 (3d Cir. 2002).

In the case of Stanford v. Commr 152 F3d 450 (5th Cir. 1998) the Court held that a taxpayer could rely on their tax advisor who was an expert in the relevant area of law. The Court ruled that the tax expert who advised the taxpayer was “diligent in reviewing the taxpayer’s business and tax records, and studying the statutes, case law, legislative history and regulations.

In Larson v. Commr TC Memo 2002-295, 84 TCM 608 (2002) the Court held that to satisfy the “reasonable cause” and “good faith” exception the taxpayer must provide necessary and accurate information to the tax advisor. In this case the taxpayer had reason to believe that the tax reported on the tax return was not accurate, and was not able to satisfy the “reasonable cause” and “good faith” exception as the “taxpayer should have made additional efforts to assess the proper amount of their tax liability.

In Woodsum v. Commr. 136 TC 585 (2011) the court held that the taxpayer must rely in good faith on the tax advisor’s judgment or advice. In this case, the Court held that the taxpayer’s reliance on the tax expert did not constitute reasonable cause. Here the tax return failed to include a $3.4m tax item and also substantially understated the tax liability.

In Woodsum, although the taxpayers provided the tax firm and other competent professionals with accurate information through more than a hundred information returns, the Court did not apply the reasonable cause exception because the tax professionals did not provide advice to the taxpayers.

Tax Advice as defined in Treas Reg section 1.6664-4(c)(2) constitutes analysis or the conclusions of a professional tax advisor. In Woodsum, the taxpayers did not provide evidence to show that a professional tax advisor’s analysis or conclusions led to the omission of the item on the tax returns. Instead the taxpayers merely perpetuated a clerical mistake. The taxpayers failed to satisfy either reasonable cause or good faith as the taxpayers did not review the prepared return to ensure that the income items were included.

Taxpayers may rely on a tax expert (i.e. tax attorney) as long as the tax advisor had apparent expertise to justify their reliance, the taxpayer provided the necessary and accurate information and the taxpayer relied in good faith on the advice received from the tax advisor. The tax advisor must be licensed and have sufficient background, credentials and expertise to provide the advice requested by taxpayers.

In addition taxpayers should keep detailed records of advice or conclusions the taxpayer may have provided the taxpayer including any relevant tax opinions.

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