The IRS is Dramatically expanding its efforts to unearth unreported offshore income, and prosecute offenders who try to hide money in international bank accounts in order to avoid paying income taxes.
Federal tax authorities are looking to force HSBC India to reveal the names of 9,000 U.S. taxpayers of Indian descent. They have reason to believe that there are thousands of bank accounts with unreported income of $100,000 or more generated by U.S. residents. This income is taxable under the current IRS codes.
The IRS is in a multi-year campaign against undeclared offshore accounts held by U.S. taxpayers, previously focused on accounts held by banks in Switzerland, including UBS AG.
UBS admitted two years ago it had plotted to defraud the U.S. government by helping wealthy Americans hide their assets in swiss bank accounts. UBS paid $780 million to avoid criminal prosecution and turned over 4,000 names.
If you are considering depositing money in an offshore bank account, check with your attorney or CPA first to make sure you aren’t breaking federal law. We see many cases involving hidden bank accounts, and can help you if the IRS is auditing your complex financial transactions.
Have you ever tried to reason with a someone who is emotionally convinced they are right? No amount of logic or evidence can convince them they might be wrong. They remain firmly entrenched in their beliefs.
Some good folks believe that the IRS may be unconstitutional. But it doesn’t matter that they may be incorrect in their views. They’re convinced they are right and it is very difficult to convince them to the contrary.
Even Idaho’s Republican lawmaker Phil Hart believes the IRS is unconstitutional. As a result, he stopped paying his taxes to protest the IRS. Not surprisingly, the IRS wasn’t convinced by his position and they slapped a $300,000 tax lien on him. One would hope that an elected US government official would choose a different method to express his feelings than stop paying taxes, increasing the tax burden on his constituents.
Apparently Mr. Hart felt that it was alright for the people who elected him to pay his salary, benefits and social programs and he should not contribute. (Read the article at KHQ.com)
What’s the lesson here? Taxpayers are free to believe that the IRS and the current system of taxation is unconstitutional, but believing that doesn’t make the IRS go away. The best way to change a system is to work to change the system using legal means, not by breaking the law, or causing the government to come after you.
It doesn’t help you, or change the tax laws, if you damage your financial life by having the IRS come collecting.
If you owe back taxes, you should strongly consider dealing with the IRS – sooner rather than later.
[Image source: Phil Hart Constitutional Income Book]
In a recent blog post I talked about the IRS Whistleblower office and the mysteries surrounding the program.
But today I wanted to provide a counterpoint perspective. I don’t want you to think that I’m against whistleblowing in a case where there is a tax cheat, and I do like that this system provides an incentive for taxpayers to help bring to justice those who would cheat on their taxes. I support it for the same reason I support Crimestoppers and other crime-reporting measures: While approved officials should ultimately be the ones to investigate and protect us from lawbreakers, sometimes the “person on the street” can see laws being broken that others cannot.
I also like that the IRS is theoretically incentivizing whistleblowers. (I say “theoretically” because it doesn’t sound like anyone has been paid yet).
Here’s why I really like this program more than many others: While it is not a perfect system, it is a system designed to help stop tax cheats. Frequently, we see many IRS programs initiated that seem to focus on squeezing more tax dollars out of hard-working, honest taxpayers while completely ignoring those who are working the system and getting a loophole. This program focuses on those who truly should be paying more taxes: the tax cheats!
If you are aware of a situation where someone is cheating on their taxes, you could earn a reward while doing your part for the country. You can earn between 15% and 30% of the proceeds collected by the IRS (as long as the amount owed is above $2 million). There are smaller rewards if the amount is less.
This has the potential to be a good program as long as the IRS doesn’t get bogged down in bureaucracy. And if they really want it to be successful, they should keep a running total of the amount of payouts they’ve made thanks to whisteblowers.
Years ago, it used to be very difficult for people to come forward to report illegal activities if they knew that their jobs (or even their lives) were in danger. Slowly, over the years, the government has put various programs in place to help people feel safer about reporting problems, including the Whistleblower Protection Act of 2007.
While whistleblowing is often thought to protect an employee from retaliation by an employer for whistleblowing, there is also provision for taxpayers to blow the whistle on individual or corporate tax cheats.
Before I talk about it further, let me give a balanced viewpoint: On the positive side of the argument, this is a way to bring to justice people who cheat on their taxes. I’m happy about that because, although I believe we should pay less tax, I believe we should do so fairly and ethically. On the negative side of the argument, though, this can be a retaliatory strike by disgruntled people to try and trigger an audit on those with whom they hold a grudge and I can only hope that those who act on whistleblower’s tips do so with caution and respect.
What initially prompted me to blog about this in the first place was an article I read in South Coast Today in which the reporter interviewed IRS official Stephen Whitlock who is in charge of the IRS’ whistleblower’s office. You can read the full interview here but I will summarize and make some additional comments.
What you’ll find when you read this article is that Whitlock says very little. By law, he’s not allowed to give a lot of detail, which is fine, but what he can say comes across a little offensive. When asked about the motivation that people have to blow the whistle, he attributes it to a desire among people to make sure that everyone pays their fair share of taxes. After that, he admits that there is a retaliatory motivation and a financial motivation.
What I found most interesting about the interview was this: There is supposedly hundreds of millions of dollars that the whistle is being blown on. More than one thousand whistleblowers reported people owning more than $2 million each (some more than $100 million each). And the IRS seems to be very generous with the reward money they pay out, claiming that they will pay between 15% and 30% of the collected money.
But don’t miss this: The IRS hasn’t paid out any money yet (really? In spite of having that many whistleblowers?). Their reasoning is: It takes a long time and they can’t tell anybody about it.
So, that leads me to wonder: Will they pay anything out at all? And how would we know anyway? How could anyone know if they were owed money by the IRS for this? (After all, they can’t even tell whistleblowers what the status of the investigation is). You can only get the 15% to 30% reward if the amount collected is over $2 million. If it’s under, you get a much smaller (unstated) amount and, according to the IRS, you cannot dispute the amount.
It sounds exciting to earn money for being honest… but I wonder if you’ll have a better chance of making money in the lottery.
I came across this interesting study done on the behalf of the IRS Oversight Board. The study asked participants if they felt it was okay to cheat on their taxes. The study itself has been done since 2002 and over the years, the range of people who feel that it is completely unacceptable to cheat on their taxes usually fluctuates between 84% and 86%. In 2009, 84% of respondents said it was unacceptable to cheat on their taxes.
What I find interesting is that in 2003, only 81% said it was unacceptable to cheat on taxes and in 2008, 89% said it was unacceptable to cheat on taxes.
Along with the answer of “completely unacceptable” (the orange bars in the graphic below), somewhere between 6% and 12% believe that it is okay to cheat a little here or there (the light blue bars, below). And 3% to 5% of respondents believe that you should cheat as much as possible.
You can read the rest of the article at the New York Times.
So I went and dug up the number of tax returns filed to see what this meant in real numbers. Let’s use 2008, because we have all the data we need from that year:
In 2008, according to a report by the IRS, 155 million tax returns were filed. So here’s what it meant for 2008 tax returns:
89% of respondents, or 137,950,000 tax returns were completely honest.
6% of respondents, or 9,300,000 tax returns had a few cheats here or there in the return.
3% of respondents, or 4,650,000 tax returns were as dishonest as possible.
Those are interesting numbers. Here’s my take on them: I believe in paying less tax, but I believe in doing so legally. The IRS needs to be more understanding with people who are having difficulty paying their taxes, and they need to offer them real options to help them with their tax debt.
Most people with IRS problems want to want to pay their tax debt, but if money is tight, they need the IRS to be more willing to work out an arrangement. Whether that’s a payment plan or an Offer in Compromise settlement offer.
And just as importantly, the IRS needs to create ways to reduce the number of income tax cheaters (13,950,000 tax returns have some form of dishonest response).
By being so tough on honest people who are having trouble paying their tax debt, instead of going after the cheaters, the IRS is not doing its job as well as it sould.
Bernard Kerik, a former New York City Police Commissioner, pleaded guilty recently of tax evasion.
The Associated Press reports that Kerik was nominated to head up the Department of Homeland Security in 2004, after being nominated to the post by Rudy Giuliani.
During the vetting process that anyone applying for sensitive positions must go through, he made statements that were later proved false. His charges were divided into 3 different categories: Corruption (and these charges were later dropped), lying to the White House, and tax crimes.
Kerik’s Tax Crimes
Kerik pleaded guilty to the following tax crimes:
Lying about paying taxes on his children’s nanny
Hiding income from the Internal Revenue Service
Faking a charitable contribution
Failing to declare on his returns book royalties, consultant fees and the use of a BMW
The Associated Press writes, “Kerik could be fined in addition to being sentenced to prison. He has already agreed to pay nearly $188,000 in restitution and to resummit his personal tax returns for six years, paying past-due taxes and penalties.”
It seems like everywhere you look there is a new “syndrome”. There’s road rage – which some of us encounter in our daily commutes. There’s retail rage (or shopping rage), which some of us encounter when we have to wait in line at the grocery store. It feels like people are generating new and creative syndromes with every problem.
In the New York Times article, “Late Filing Syndrome”, the article describes the sad plight of a down-and-out person who has not able to pay their tax bill.
Oh, did I say “sad plight of a down-and-out” person? I meant: educated, six-figure-earning political aide Charles J. O’Byrne. O’Byrne claims that he suffers from a very specific form of depression called – are you ready for this? – “late filing syndrome”. Yeah, you read that correctly.
It seems that, just around tax time every year, he falls into a depression that is so difficult to manage, he is simply unable to file his tax returns. Ironically, this sickness only ever appears at tax time and, in O’Byrne’s case, it appeared 4 years in a row – from 2001 to 2005.
Although it’s not a syndrome he fabricated himself, the American Psychiatric Association doesn’t see it as a psychiatric condition… I guess the Psychiatric Association is just like the rest of us Americans who can see through the bull.
I am all for legally paying less tax. However, I am against using illegal tax evasion methods, and, I don’t believe in fake excuses. O’Byrne has a responsibility to pay (and he has the opportunity to reduce his taxes by simply calling me). Instead, he has the gall to claim this particular problem.
It’s galling because his income is paid for by our tax dollars. What if everyone in the US suddenly was hit with a bout of late filing syndrome? He’d be out of a job.
It’s also galling because it shows that he thinks the rest of us are fools. C’mon… did he really think that we’d take pity on him because he procrastinated on his income taxes too long?
It’s like the old “my dog ate my homework” trick. Or the “I didn’t get your letter.” excuse. Everyone (especially the IRS) can see through those lies!
There’s another syndrome – a far more serious one – that occurs with regularity. It’s equally rare. During a full moon, those bitten by a wolfman will themselves become wolfmen (or wolfwomen). My diagnosis? Equally laughable; equally silly.
A CNN article rightly attacks the “syndrome” for what it is: a made-up excuse by a tax lawyer in an effort to get his client out of trouble.
I’ve got my own syndrome. Let’s call it: “shake-my-head-at-foolish-people” syndrome.
There are two constants in life – death and taxes. Since neither one are events that people look forward to, it’s only natural that we fight both of them with tooth and nail. After all, taxation is the loss of our hard earned money… and death is the loss of, well, everything else.
We do our best to avoid death’s inevitability by eating right, exercising, cutting down on sweets and cigarettes, and making sure we look both ways before crossing the street.
And as for taxes – that’s a little more complicated.
You see, the IRS draws a line between tax avoidance and tax evasion. In general terms, here’s the difference:
Tax avoidance is when someone works within existing laws to pay the least amount of taxes that the IRS says are rightfully due from them. Tax avoidance is legal.
Tax evasion is when someone works outside of existing laws by not paying the taxes that the IRS says are rightfully due from them. Tax evasion is illegal.
Tax avoidance is perfectly legal, and the United States Supreme Court has recognized this fact. The Court has stated that “The legal right of an individual to decrease the amount of what would otherwise be his taxes or altogether avoid them, by means which the law permits, cannot be doubted.” See Gregory v. Helvering.
Let’s look at an example: Tax avoidance is when someone creates a legitimate company (like a home-based business) to take advantage of tax write-offs that come with owning a business that is producing a profit. The person actually sells goods or services in their spare time and reaps the rewards by being able to write-off a portion of their home and car. Tax evasion is when someone sets up a fake company, which doesn’t actually do any business, to hide income that they’re earning so that they don’t have to pay taxes on it.
Of course, that’s just one example but there are many others. In helping taxpayers with IRS taxation issues, I would heartily advise legal tax avoidance efforts. Some of those include:
Set up a profitable small business
Claim all deductions that you rightfully can claim
Put as much money as possible into your 401k
Having said that, let me now highlight a challenge that taxpayers are facing now and going to face in the future: The shrinking opportunity to legally avoid taxes. In some cases, tax loopholes exist which taxpayers are legally taking advantage of, but those loopholes are closing. In other cases, the IRS creates layer after layer of obfuscation and complexity so that tax advantages are minimized.
What can you do about it? Frankly, not much. When Congress and the IRS detect that their pockets have a small hole in them, resulting in precious nickels returning to the taxpayer’s pockets, you can be sure that they’ll get out the red tape and they’ll sew up their pockets to collect more.
But until then, take advantage of those opportunities!
Celebrities seem to live in their own little world. While the rest of us pack our lunches and punch the clock from 9 to 5 (or more like 8 to 6, these days), celebrities sit around and bask in their own fame. The British have their monarchy and we have our own version of it – celebrity. They live by their own rules and make bazillions of dollars by doing very little.
To borrow a line from the Spider-Man movie, with great wealth comes great responsibility (to pay taxes). And, like most of us, these people find taxation a difficult burden. And some of them don’t pay.
From time to time, I’ll highlight celebrities who run “afoul” of the IRS. Today’s celebrity: Wesley Snipes.
He played a nearly invulnerable half-vampire/half-human in the movie Blade but actor Wesley Snipes proved that he was not invulnerable to the government of the United States of America. Snipes evaded the law in such movies as Demolition Man (1993), US Marshals (1998), and Art of War (2000), and during that time, he evaded paying his taxes!
You can read all about Mr. Snipes tax evasion case at Wikipedia. To summarize, he was charged in 2006 with:
1 count of conspiring to defraud the United States
1 count of knowingly making or aiding and abetting the making of a false and fraudulent claim for payment against the United States
6 counts of willfully failing to file Federal income tax returns by their filing dates
Snipes was acquitted of most of these charges, with the exception of 3 of the 6 counts of willfully failing to file Federal income tax returns by their filing dates. He was sentenced to 3 years in jail. (Although not IRS-related, you might also be interested to know that Snipes has failed to pay property taxes on two homes he owns as well. It’s also referenced in this Wikipedia article.)
The moral of this story?
Don’t act in 3 movies where you play a hero on the run from the law! Sooner or later, that kind of fiction will turn into fact!
There are legal strategies you can use to pay less tax. Simply pretending you’re not an American citizen (which is what Snipes tried) doesn’t work.
If you owe unpaid taxes, I can help you. (If Mr. Snipes had called me instead, there is a high likelihood he wouldn’t be making license plates right now because I’d have asked him to file his tax returns).
The use of numbers in advertising is sometimes comical. You’ve probably heard the commercials that say something along the lines of “9 out of 10 dentists will tell you to brush with XYZ-brand toothpaste”. Or, web hosts will often advertise 99.9% uptime.
These statistics tell us something. Namely, they tell us that there’s one rogue dentist out there that didn’t like his free sample of XYZ-brand toothpaste. And, they tell us that your web host service could be down a surprising 525.6 minutes each year (nearly 9 hours of down time).
Using the same statistics, you can get glass-half-full and glass-half-empty points of view. With his typical neurotic wit, Woody Allen once said, “I don’t see the glass as half empty… I see it as half full – of poison.” (From the Woody Allen/Scarlett Johannson movie Scoop).
Each year, the IRS spends several thousand of our tax dollars to compile statistics on the previous year’s tax returns and then offers them up for us to ignore. You can ignore the IRS statistics.
I’m fascinated by a few of these numbers and I’d like to highlight a couple here:
Statistic one: Helpful? Or not helpful at all?
On this page we read that there were 138 million individual tax returns filed in 2007 for the 2006 tax year (not to mention a few million more for various corporate and estate tax returns). And, on the same page, we read that there were 63 million letters, calls, or walk-ins to an IRS office to get help on tax issues. For those with an calculator handy, you’ll notice that those numbers translate into a 2:1 ratio (actually, it’s more like 2:1.2 but we’ll allow that some people might have had to call more than once). So, for every 2 tax returns, the IRS helped someone. I think they want us to believe that they’re helpful. But what it really shows is that our tax forms make no sense to 50% of the population. Can you imagine how any company would survive if 50% of its customers called in because they didn’t understand the user manual? Or can you imagine the chaos on our roads if 50% of drivers couldn’t drive without getting help?
Statistic two: The most expensive letter you’ll ever receive
On tax stats we can download a spreadsheet under the heading “Recommended and average recommended additional tax after examination, by type and size of return” and read about the 2006 fiscal year’s tax returns. According to this spreadsheet, they received 134 million individual tax returns and examined (audited) about 1% of them: 1.3 million tax returns. Of the returns that were examined by correspondence (via the mail, not in person), the average recommended additional tax per return was $8,710! That’s the most expensive letter you’ll ever write. (Still, if the IRS field agent goes into the field to examine the return, the average recommended additional tax per return was $20,419).
If the IRS shows up at your door, they are not there to help you.
