Okay, we’re alone.
Nobody’s listening.
It’s time to make a clean breast of it. Admit you cheat on your taxes.
Doesn’t everyone?
You may not do it personally. But you’re hoping that with all the money you pay your accountant every year, he’s able to find some clever loophole to lower your annual burden.
The secret pact between you and your accountant is like the policy on gays in the military: “Don’t ask. Don’t tell.”
This morning, the wire services are reporting the story about the tax amnesty granted to more than 14,700 Americans who have admitted that they have secret offshore bank accounts to avoid taxes.
Americans with undeclared offshore accounts have been under mounting pressure since Switzerland agreed on Aug. 19 to hand over data to the U.S. on as many as 4,450 UBS accounts to settle a lawsuit in which the U.S. had sought as many as 52,000 accounts. Recently, Switzerland said it will turn over details of UBS accounts held by U.S. residents who had more than 1 million Swiss francs ($985,000) in undeclared assets.
Oversight May Become More Strict
Even though this latest development potentially may net the government billions over the next several years, most experts agree that it’s only the tip of the overseas tax iceberg. By conservative estimates, the U.S. loses approximately $100 billion a year because of international tax cheats. Some analysts believe the taxes losses to the federal government may be 3 to 4 times that amount.
Under the IRS’s partial amnesty program announced in March, the tax agency will take 20 percent of a disclosed account’s assets based on its peak value in the previous six years. In cases of inactive accounts, the agency will confiscate as little as 5 percent.
At the end of October, key lawmakers unveiled a bill that they say will strengthen the government’s ability to crack down on wealthy tax dodgers hiding money overseas. The bill would impose new reporting requirements on foreign financial institutions doing business in the U.S., and on American advisers who help U.S. residents make investments overseas. Foreign firms that don't comply would be hit with a 30 percent withholding tax on income from their U.S. assets.
A version of the bill will be simultaneously introduced in both the House and Senate. The bill will be sponsored, among others, by U.S. Rep. Charlie Rangel (D-NY) in the House along with Sen. Max Baucus (D-MT) and Sen. Carl Levin (D-MI). According to its sponsors, the bill will raise an estimated $8.5 billion over the next ten years.
While this legislation has taken aim at individual tax cheaters, it does not address the questionable tax practices of American multinational corporations who avoid taxes on overseas profits by sheltering their earnings offshore. Under a loophole provision of the tax code, companies can indefinitely circumvent their U.S. tax liabilities on foreign earnings if they keep their profits parked overseas.
Not Everyone Will Be Caught
Defenders of the policy say it’s a sensible way to level the playing field for U.S. corporations. They argue that they need this relief because most foreign governments don’t tax the overseas earnings of companies based in their countries.
Critics of the provision known as deferral contend that the policy encourages U.S. companies to add facilities and jobs overseas rather than reinvesting their earnings domestically. They also claim that deferral hampers the government’s ability to raise revenue it sorely needs. Current estimates place the deferred earnings held by U.S. corporations overseas to be as much as $800 billion. Annually, this translates into about $75 billion in lost tax revenues to the federal coffers.
During the 2008 Presidential campaign, candidate Obama was vocal about his promise to restore fairness to the tax system. Among the loopholes he promised to close was the tax deferral scheme employed by U.S. multinational companies. In his first budget address, he once again vowed to “reform deferral.” He pointed to a variety of measures that he projected could raise an estimated $210 billion in lost tax revenues over the next decade.
With this latest version of reform just starting to make its way from the White House to Congress, the long knives have already come out.
Several groups, including the Business Roundtable, the U.S. Chamber of Commerce, the National Assn. of Manufacturers and the National Foreign Trade Council, have formed a lobbying coalition called Protect America's Competitive Edge that is devoted specifically to the issue. A letter sent to Congress last month opposing the plan was signed by 200 trade associations and companies, including General Electric, Intel Corp., International Business Machines Corp., McDonald's, Merck & Co. and Microsoft Corp.
Although business lobbyists have been vocal in their opposition to closing this tax loophole, it appears they may be willing to support some limited modifications to the deferral policy if it is part of a larger tax overhaul that also gives them something they want. On top of their shopping list is a lowering of the corporate tax rate.
Most Capitol Hill observers believe the efforts to close the deferral loophole have little chance of passing this year or next, especially in the midst of a healthcare reform battle that has consumed Congress and White House. The push for reform has also been slowed by the concern that any radical changes coming so soon on the heels of the worst economic crisis in 70 years could put a damper on the pace of the recovery.
Either way, the President needs to stand up to the business community on this issue. Given the budget deficits facing the U.S. taxpayers over the next several years, we can ill afford to let these cheaters prosper.
John Cohn is a senior partner in the Globe West Financial Group based in West Los Angeles. He may be contacted at www.globewestfinancial.com
