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IRS Commissioner Schulman's Talking Points Memo re: remarks to Organization For Economic Co-Operation And Development )OECD). Greater International Tax Enforcement and proposed changes to international tax legislation. An Editorial by Andrew J. Powers
On June 2, 2009 Doug Shulman addressed the OECD regarding greater global cooperation to enforce tax compliance by U.S. taxpayers and IRS tax enforcement of existing international laws and regulations as well as President Obama's proposed legislation. His address was comprehensive and we will certain address points.
The gist of his address regarding President Obama's reasons for proposing bold international tax legislation and for the IRS making international tax enforcement a top priority can be summarized by his statements that "...we are at a critical juncture in our journey to step up our game in international tax issues. You can see and sense that real change and real progress have been taking place over the past year. And it is taking place both at the corporate and individual level as we work to both eliminate the potential for corporations to exploit gray areas in the tax code, and to ensure U.S. individuals with assets overseas are paying taxes.....In today's economic environment, it's more important than ever that the American people feel confident that everyone is playing by the rules and paying the taxes they owe......On the world stage, the global economic downturn and recent tax evasion scandals have spurred urgent calls for fairness and transparency of the tax system."
In his remarks he also pointed out that although most major multinational corporate taxpayers are making their best effort to comply with the extremely complex tax laws, rules and regulations, "for individuals with overseas income and assets, it's much more straightforward. If you are a U.S. person holding overseas assets, you must pay your taxes or we will be very focused on finding you. It's as simple as that."
In editorializing the remarks and reading between the lines, I sense that (as in politics) perception is becoming more important than reality.
As a former tax executive I can vouch for the fact that U.S. multinational corporations are faced with a complex web of extremely complex international tax law, regulations and rules. Tax executives of most of these corporations are members in good standing of the Tax Executives Institute and many are CPAs and tax attorneys and are sworn to uphold the integrity of the company's tax compliance and abide by U.S. tax laws. All publicly held companies and many private corporations are subject to annual audit by CPA firms who are responsible for reviewing their taxes and the recent development of Form 1120, Schedule M carefully coordinates the tax provision contained in the corporate tax provision (and disclosed pursuant to SEC rules) and the corporation income tax return. Yes there are those who have pushed the back of the envelope as regards tax strategies and many have been penalized along with the tax advisors who may have sold them on the scheme, and those who have not been caught will be eventually. But these are relatively few in comparison to the total number of multinational corporate taxpayers, as Commissioner Shulman pointed out. Yet public perception and that of many politicians based on what they read in the media is that there exist many "tax loopholes" within international corporate tax laws. Those who understand international taxation, it's economic ramifications and legislative intent will staunchly disagree with the statement that there are many tax loopholes found in international tax laws and the complexity of the laws is designed to prevent abuse. Speaking of abuse. There is something referred to as the tax avoidance doctrine. Within the U.S. Tax Code there is a provision that clearly states that any financial transaction (by any U.S. taxpayer) which is entered into without a sound economic purpose, will be deemed to be a transaction designed for the purpose of avoiding paying income tax and thereby all related deductions or losses will be disallowed. Penalties for abusive transactions are provided by law.
As for individual taxpayers, during my long career of more than 35 years as a tax professional which includes working in public accounting with tax departments of Big 4 CPA firms (then Big 8) as well as in private practice, I have also worked on thousands of U.S. personal income tax returns including people covering the income spectrum from low income individuals to high wealth. It has been my experience that most individual taxpayers want for nothing more than to comply with U.S. tax laws and to be left alone. The thought of dealing with the IRS strikes intense fear in the hearts of most people. This includes many of the individual international tax returns that I have worked on, especially executives of banks or large corporations who could cause grave harm to their employers and their careers by cheating on their taxes. This is not to say that I have not come across people who have sought ways to evade paying income taxes on tax forums and some even sent me emails asking how they could avoid paying U.S. taxes through the use of offshore holding companies in tax havens, although these are few when compared to the general population. The fact is, that under U.S. law, a U.S. taxpayer (including citizens and foreign persons considered residents for U.S. tax purposes) are taxable on their WORLDWIDE income from all sources. After the U.S. tax is computed there are credits for foreign taxes paid or accrued to avid double taxation along with double taxation provisions of international tax treaties. But the simple fact is that international tax laws are just as complicated for individuals as they are for corporations. They are required to report all transactions with foreign entities and financial institutions and ownership control in foreign entities and the manner in which they are taxed on their income and foreign investments is complex and is designed to capture all worldwide income and individuals who fail to file income tax returns or report their worldwide income face substantial monetary and sometimes criminal penalties.
In my opinion, the solution to closing the international tax gap is not amending existing tax laws or proposing new laws that will only serve to make matters more complex and possibly impede international trade and investment (which in today's global economy is more important than ever), and possibly create unintended tax consequences by changing what is now an extremely complex system of tax rules; the solution is found in educating taxpayers, their representatives and IRS agents-at least making them aware of the basic rules-and enforcing compliance with the existing laws and rules in a manner that encourages adequate voluntary compliance. Corporations hire tax executives who have spent a lifetime learning complex tax rules, and even they rely on daily advise from their outside tax counsel and advisors. Unfortunately in today's global society more and more Americans are seeking economic opportunities and employment in foreign countries. Many form businesses overseas. Most are subject to filing tax returns and paying income taxes to foreign countries in which they work or do business. Under existing U.S. tax rules many are required to report information pertaining to their foreign bank and financial/investment accounts. All are required to report foreign investment income. If they own a foreign business they must all file information returns to report transfers of property with the foreign business, regardless of whether it is a corporation or a "check the box" or otherwise "disregarded entity". They all must file annual information reports showing the ownership and financial results summary of the foreign entity. Punitive penalties may be imposed for intentionally not filing these reports or not reporting taxable foreign source income. In my opinion the existing tax legislation is more than adequate to capture all of the information the IRS needs. The solution, once again is in education to ensure adequate compliance by honest taxpayers who are eager to comply and enforcement of these tax rules as regards those who continue to intentionally disregard the tax rules once they are aware of them.
Shulman also stated that he seeks to expand the Qualified Intermediary system. What this is a voluntary agreement among participating nations to use existing technology to cross report financial activities between global partners. I personally feel that this is a good idea in that it would bring to light global economic and financial transactions, and feel that such a pursuit would yield far greater economic benefits than tampering with international tax legislation and existing international tax compliance structure which has evolved over decades, often based on international trade objectives.
A SIMPLE SUGGESTION TOWARD ACHIEVING A SOLUTION TO ACHIEVING TAX ACCURACY, SIMPLIFICATION AND FAIRNESS-Restore the Third Person Designee and old Circ. 230 rules
I also feel that by working in cooperation and partnership with the informed and knowledgeable representatives of U.S. taxpayers, regardless of whether they are CPAs, attorneys or enrolled agents of the IRS, would yield far greater results as far achieving a greater degree of adequate tax compliance and arriving at correct income tax liabilities and the payment of those taxes. This would limit abuses and perceived abuses with respect to both the taxpayers as well as the IRS and was paramount in drafting the 1998 tax legislation sometimes referred to as the Taxpayer Bill of Rights. Until recently any person who prepared a tax return for a taxpayer could discuss the return with the IRS and provide them with information and this was a Form 1040 "check the box" rule. Although the Third Person Designee box still exists on the Form 1040, IRS employees are prohibited from discussing the tax return with the preparer unless they initiate contact, which they never do except where preparer fraud is involved. Now if the preparer calls the IRS the first question that is asked is if they have a Power of Attorney on file, even though the taxpayer signed a tax return designating that they could represent them, and by the time the POA is obtained and filed (and often returned for technical reasons) the return is often processed or an incorrect tax assessment made.
In the past, if the IRS had a question or proposed a change to a tax return, the tax return preparer could respond and often quickly and inexpensively resolve the problem on behalf of the taxpayer. Additionally, if the tax return was under examination, or there were issues that led to proposed changes or were holding up the processing of a tax return, the problem could be easily resolved by ANY chosen representative of the taxpayer, regardless of whether they prepared the return or not. Especially in today's baby boomer era, there are many tax professionals who have worked for CPA firms or as tax executives of major corporations who may have allowed their CPA credits to lapse or may not be current on CPE requirements but have extensive education and knowledge as regards matters pertaining to both domestic and international income taxation who until recently could resolve problems for both taxpayers and the IRS and help them in arriving at a correct income tax liability and ensure proper tax compliance. However under new restrictions imposed by IRS Circular 230, the taxpayers ability to seek representation and the IRS' ability to reach a prompt and accurate settlement is significantly impeded. As a result, more tax liens are issued, taxes are put on the books that are not owed, often tax bills do not get paid, penalties are added to incorrect tax bills and the cycle grows. This creates a nightmare for not only taxpayers but the IRS and the American people as a whole as money that is owed is not collected and often the collection of money not legally owed is enforced (despite the 1998 Taxpayer Bill of Rights).
The bottom line is (absent those few who still feel they can scam the public and the government) most legitimate tax professionals hired by American taxpayers are anxious to help the IRS and their clients to reach a prompt and accurate settlement so that the correct amount of taxes are timely paid. Most are true professionals and many have more education and experience than some of the IRS agents which helps the IRS. Working in the spirit of partnership and cooperation with all tax representatives (as was permissible under the old Circular 230 rules and the Form 1040 "check the box Third Person Designee" rules) would save the IRS (and the American taxpayers) money and achieve a much more desirable result.
The Commissioner's remarks also discussed a legal presumption of intent to evade taxes should a person do business with a non-Qualifying Intermediary. Although I strongly support pursuing those who transfer money to financial institutions known to support terrorism or proven to assist in the avoidance of paying income taxes, we, as a nation, must be careful not to legislate in a way that would discriminate or otherwise violate Constitutional rights such as a presumption of innocence and burden of proof. Similarly, Shulman stated that the Administration has asked Congress to extend the statute of limitations for international taxpayers from three years to six without affecting the general statutory rules pertaining to non international taxpayers. Once again, this will no doubt need to be reviewed to ensure that it is not discriminatory.
Also Commissioner Shulman stated that the President's budget calls for hiring 800 additional international tax specialists who would help crack down on international tax avoidance. In view of all the IRS budget cuts and layoffs over the last ten years the IRS certainly needs a budget increase. However, how a budget is spent and the effectiveness that an increase yields has been and continues to be the primary issue. Although additional personnel may be needed, why not spend money better educating and training existing personnel as well as the taxpayers and work in the spirit of cooperation to improve compliance initiatives by working in cooperation with taxpayer's and their designated representatives. There will always be a need to enforcement with regard to those who intentionally seek to evade paying taxes, and this should be pursued; however more can be done to encourage voluntary compliance among honest taxpayers.
In conclusion, I believe that most Americans want to comply with all tax laws, both international and domestic and some need help understanding their responsibilities, especially international taxpayers. Threatening them with penalties and criminal prosecution will only cause more Americans who are overseas to run and hide. I feel that helping them achieve their statutory and regulatory compliance requirements will achieve far more desirable results. I also feel that now is not the time to make knee jerk legislative changes to international tax law which could result in far more damage than that which is perceived to exist presently. Because of their complexity these provisions require long and careful study by both tax experts, economists and international trade experts.