It’s widely known among tax professionals that the US does little in the way of tax enforcement, and the little that it does do is directed against individuals and small businesses.
What is not so widely known is how deep the institutional bias is in the IRS in favor of letting big corporate tax cheats get away with it.
Conventional wisdom is similar to the rationalization of weak enforcement at the SEC: that the agency is afraid that if they go after big companies, they’ll have the penalties and fines challenged in court, and they’ll often lose by virtue of being outgunned by better lawyer (yes, Virginia, even if you have a solid case, that doesn’t mean you’ll win at trial). And top tax litigators are among the most highly paid legal talent. I’m not up on current rates, but in the mid 1980s, Sumitomo Bank fought the IRS on a $100 million assessment and won. Their attorney was a solo practitioner who charged $1000 an hour.
It turns out that the picture is vastly worse than that. In 2006, recognizing that the IRS was losing over $450 billion a year in revenue to tax evasion, Congress mandated that the agency establish a whistleblower office and pay whistleblowers 15% to 30% of amounts recovered from their filings. Unfortunately, as a whistleblower from the IRS’ Office of the General Counsel in New York has revealed, the IRS at its highest levels is opposed to implementing the policy.
This whistleblower, Jane Kim, makes it clear that in this letter, she is acting as a de facto spokesperson for an attorney that represents IRS whistleblowers. The missive, which we’ve embedded at the end of the post, presents three cases where the tax revenue lost exceeded $13 billion. Two of them looked to be particularly egregious. In one, a company set up completely sham foreign companies, with no operations whatsoever in any of these tax jurisdictions. Yet it claimed all of its profits were due to these phony companies and were kept permanently offshore (regular readers may recall that US technology companies who use Ireland and other low-tax domiciles to attribute their profits to “offshore” operations actually keep those “offshore” monies in US banks. For instance, Apple runs what amounts to a hedge fund to manage its “offshore” funds in Nevada). The effect of this scheme was that the company paid corporate taxes nowhere. That scam with that one company alone lost the IRS a purported $3 billion a year in revenues.
Another mind-boggling case involved a criminal case that was peculiarly shut down. The target had foreign brokerage accounts for US individuals. The target clearly knew it had reporting, withholding, and remittance obligations for foreign accounts, since it had come forward to ‘fess up an amnesty program for past abuses. Yet it was still engaged in effectively hiding offshore income of US clients by not keeping the required records. The case had advanced far enough that the DoJ was ready to empanel a grand jury, and was waiting for the final go-ahead from the IRS. The IRS closed the investigation because it went along with the target’s claim that there were too many accounts to be audited (huh?) and therefore it should be permitted to sample them. The target manipulated the “random” sample to hide the misconduct.
So why does this occur? The very top level of the IRS is opposed to the whistleblower program, and more broadly, is effectively in bed with large corporations. As the whistleblower’s letter points out:
The IRS Chief Counsel Donald Korb, under whose tenure the Office was created, openly expressed his views on this issue when stating, “The new whistleblower provisions Congress enacted a couple of years ago have the potential to be a real disaster for the tax system. I believe that it is unseemly in this country to encourage people to turn in their neighbors and employers to the IRS as contemplated by this particular program. The IRS didn’t ask for these rules; they were forced on it by the Congress.”
The letter, which I strongly encourage you to read, includes describing how the IRS adopted specific policies to vitiate the whistleblower program, such as refusing to pay awards if they resulted in the reduction of refunds, as opposed to paying additional taxes, even though the financial impact is the same.
The letter also describes how the IRS bends over backwards to cater to “favored” taxpayers, even going so far as to engage in retaliatory audits against IRS attorneys who publicize the IRS waving through tax scams.
This isn’t the first time Kim has alleged IRS misconduct; David Cay Johnston publicized other charges by Kim in Tax Notes Today, such as pervasive mismanagement of cases and failing to ride herd on abusive union stewards in its New York office. But these charges are vastly more troubling, since they indict the top level of the IRS.
Raw Story interviewed the whistleblower attorney who approached Kim after she made her charges of gross mismanagement and waste of resources. Her letter presumably represents the meatiest of his cases. He describes how the agency has been captured by large corporations:
…the private sector lawyer and ex-IRS attorney explained that since 1998, IRS restructuring has focused on bringing in “outside people.” This led to the employment of an extra layer of executives who were previously “partners from big accounting firms.” Citing active IRS criminal agents, the ex-IRS attorney said: “Almost every large firm or corporation has a person inside the IRS. It’s a revolving door, with the top two or three management layers all from big accounting and law firms, and this is why they won’t work big billion-dollar cases criminally. Private bar attorneys are, in effect, controlling the IRS. It’s a type of corruption – that’s the word used by one IRS agent I’m in touch with whose case was shut down by higher ups without cause.”
The incumbent IRS chief counsel, William Wilkins, was previously a lobbyist at the WilmerHale firm where for 21 years he represented and lobbied on behalf of private sector clients including the Swiss Bankers Association. Swiss banks UBS and Credit Suisse have faced penalties, hearings and convictions for helping wealthy Americans illegally conceal billions of dollars of taxable income.
Attorney James Henry, former chief economist at financial consultancy McKinsey, said that Wilkins’ firm “continued to represent the Swiss Banking Association throughout the 1990s and into the 2000s. Now Wilkins gets appointed chief counsel of the IRS in 2009, and he’s presiding over these whistleblower cases.”
So while we have Treasury attempting to defuse public ire over the latest high-profile form of corporate tax gaming, inversions, by relocating their headquarters overseas to a lower-tax domicile while not changing their US business, we have billions uncollected as a result of the IRS becoming a big-corporate crony. Kim has sent her letter to many of the right Congresscritters: Elizabeth Warren, Maxine Waters, Alan Grayson, Chuck Grassley, Bernie Sanders, Mike Lee, Rand Paul, and Ted Cruz. You can help her effort along by calling their offices, particularly if you are a constituent, and voicing your outrage over the IRS’ policy of “nothing to see here” on big corporate tax fraud. The Capitol Hill switchboard is 202-224-3121 or you can use this page at Congress.gov to find e-mail addresses and their district and DC office phone numbers.
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Dog bites man story, wake me up when a story comes along that does not just confirm the utter and total corruption of each and every last one of our institutions. Once upon a time we had people like Frank Church and Jimmy Carter who genuinely had the moral center and the courage to stand up for reform. Ron Paul at least knew the top three priorities: end foreign adventure wars; prosecute financial criminals; and stop warrantless wiretapping and the surveillance-industrial complex. What will we get instead? Hilary. The thought of that business-as-usual fascist, the favorite of Rupert Murdoch (yes THAT Rupert Murdoch) makes me want to take a powder.
In 2006, Rupert Murdoch hosted a fundraiser for Hillary Clinton’s Senate Campaign. In 2008, he and his son James, both contributed the maximum personal allowance to HRC’s Presidential run, $2,300 each. As Politico noticed about Obama… “…Obama fundraiser co-hosted by Gwyneth Paltrow and Elisabeth Murdoch.” Hillary Clinton is also one of the five 2016 candidates that Murdoch “could live with”.
While sellout faux-gressive Third-Turd Way Democrats will be voting Republican-lite, I and many others will be either writing in a candidate or sticking with “none of the above”.
There are many reasons not to vote for HRC beyond Murdoch’s support of Hillary. I and many others will not vote for a corporate Wall Street prostitute in the mold of Obama. If Democrats want a Presidential win in 2016, find a real Democrat and not those center-right DemoRepublicans that seem to infest The Democratic Party.
Of course, this means that the Republicans have a better chance. However, in the end, both corporate Democrats and Republicans get us to the same finish line labeled, “WELCOME TO HELL”.
There will almost certainly be third party candidates for President in 2016, so you shouldn’t have to write in anyone. There are even third party candidates in some of the 2014 elections. I already posted this information in a comment to another article today, but it’s worth repeating:
Green Party 2014 candidates
For those who don’t want to vote Green (I don’t understand such attitudes, but I don’t expect to change many people’s minds), there’s the Libertarian Party
I agree and thanks for the links. Rather than not voting, I encourage everyone to consider what’s (deliberately) misleadingly called “Third” party candidates. I hear people say that it’s a “waste” of a vote to vote third party because that candidate cannot win. My answer: So?
Why should I vote for someone who’s clearly in the pay of the 1%; who has clearly demonstrated that they will dance to the tune of the 1% while ignoring the 99s (other than – maybe – paying some lip service).
Voting “third” party at least might get some alternative viewpoints out into the political discussion; it might open up some avenues to consider how to make changes.
If “third” parties are allegedly so useless and pointless, then ask yourself why the 2 legacy branches of the UniParty are adamantly against having ANY “third” party involved in Pres. debates? Some loath Ron & Rand Paul, but I am always very glad to see them given a place at the debate podium, AND they don’t always get one. They should.
I’m lucky enough to live in a country with a parliamentary democracy (Australia). That means a couple of things, first of which is that a third (or fourth or fifth or even sixth) party can have an impact, usually as the swing vote or as part of a coalition. Right now we have a fascist government (Abbott) but his cutting and spending initiatives have disappeared without a trace due to very small parties including the Greens. Second thing is that voting is required by law here, which means the debate gravitates towards the center rather than having just two screeching polar opposites. Last thing is that every day they have “Question Time”, where the government must stand and answer questions, broadcast live for two hours. People hear good questions and then the realtime long version response, rather than the less-than-one-liner sound bites that rule American politics.
Open…,
Great comment. I was unaware of the Murdoch’s connection.
My question: Is what we are seeing, meaning all of these revelations coming out regarding the rot in seemingly all agencies the feds are involved in, due to changes in the regulatory systems or is it a change in how people can whistle-blow quietly and not risk retribution?
My gut based upon the writings by various others but with particular attention to that of Bill Black seem to indicate that at least back in the 80s and 90s there was some semblance of a regulatory spine, at least in the circles he flew in. I am curious if that read is correct or an anomaly, please weigh in.
X
The “Reinventing Government” movement of the Clinton/Gore administration greatly increased the damage that Reagan did through his appointments (e.g., his Department of the Interior and EPA scandals and the scandal he tried to create by giving Charles Keating control over the regulatory agency). The first President Bush was (mostly) a believer in competence in government even though he was no fan of financial regulation. The rise to power of the “New Democrats” with Clinton/Gore was explicitly and fiercely anti-regulatory. (I wrote a long piece on this, so my super short summary here is that (1) it was openly opposed to anti-fraud efforts, (2) we were ordered to refer to — and think of and treat as — the industry as our “customer,” (3) the public sector was defined as failing and the answer was to emulate the private sector, (4) privatization was to be maximized and “public/private partnerships” were to be the norm even if the public services were not privatized, and (5) we were encouraged to employ useless — and deliberately unenforceable “guidelines” rather than regulations and even these were to be “negotiated” with the industry (but not the consumers) via “reg-neg.” It was a prescription that guaranteed disaster. It helped me decide to leave and go back to school to get a doctorate in criminology and begin to teach.
Hardly JUST another dog-bites-man story. The confirmation of what is suspected is a critical step in convincing those who don’t understand the extent and (especially) the nature or the corruption, and this story a very good one on that note.
Most people still believe that these government institutions are simple incompetent, and your sleeping won’t convince them otherwise.
The ‘sleeping’ allows the perpetuity and expansion of influence of the corruption. How many are ‘sleeping’, with head in the sand or waiting for a saviour to come along ?
Don’t worry, Yves, they’ll just persecute a few hundred thousand waiters and waitresses for underreporting tips. That’ll make up the difference.
Question: when you realize that the rule-of-law no longer applies (if it ever did) and that certain people in our society are being allowed to disregard requirements that most people take for granted, what is the proper response? So far as I can tell, it’s either reform the system to replace the rule-of-law, or stop treating the rules as binding on you. If you can’t reform the system and yet you keep playing by the “little people” rules, in full knowledge that others do not have to abide by those rules…well, what would you call that? I know “chump” sounds harsh, but it’s a word I have a hard time avoiding when I read stuff like this.
I, for one, do not appreciate being treated as a chump. I, for one, refuse to act like a chump. I know the score, as do we all, and I’ve come to my determination about what the self-respecting response to this situation is. One set of rules for everyone, right?
Great comment!! Let’s not be chumps– let’s throw all our energies into dismantling this illegitimate, kleptocratic ruling regime, and establishing a transparent, open system based on true popular sovereignty.
VIS the “little people” not obeying the law, just like the BIGS do with impunity? My advice: tread carefully. As this post indicates, the IRS will come after YOU with all the force it can muster if YOU, small fry, don’t obey the rules to the letter.
Case in point: I knew a small business person who got enamored with one of those groups who promote the notion that the IRS is collecting federal taxes “illegally” (or some similar mumbo jumbo), and this group had all sorts of “documents” and whatever to “prove” that US citizens simply were not liable to pay fed taxes. Well this person I knew got totally hammered by the IRS. Lost *everything,* including his dignity. I had advised him strongly not to go down that road bc I knew, as a small fry, he was going to hurt badly.
Laws and taxes are for the small fry. If we, the people, don’t obey, get ready to take a severe beating.
Wise words. People need to be very careful.
Yeah, it’s worth remembering that even the principled Thoreau, who went to jail rather than pay taxes for a corrupt purpose, was sprung by his friends, who paid his taxes.
There’s a difference between martyrdom and meaningless self-sacrifice — it has something to do with calibration of the likely effect on others.
My friend lost:
his business
his practitioner’s license
his home
his car
his wife/marriage
any savings/money he had
He had to move in with his elderly mother, and whatever wages he makes will have some part garnisheed to pay his back fed taxes, which are quite a lot with all the late fees & fines added on. Not a pretty sight, I can assure you.
“Question: when you realize that the rule-of-law no longer applies (if it ever did) and that certain people in our society are being allowed to disregard requirements that most people take for granted, what is the proper response? So far as I can tell, it’s either reform the system to replace the rule-of-law, or stop treating the rules as binding on you. ”
Well, I’m not sure what the proper response is. But I can give you some analytical help. A system where certain people are allowed to disregard requirements which apply to everyone else — where people are NOT equal before the law — this is called a system of “aristocracy” or a “feudal” system.
Once you understand that you’re living in a feudal system with an aristocracy, perhaps that will help you figure out the correct response. Historically, I believe the most successful response has been:
(1) explaining that the aristocracy do not deserve special powers
(2) publicizing this
(3) organizing a mass movement, recruiting the entire 99% to oppose them
(4) petitioning for reform
(5) organizing a militia to oppose them
(6) overthrowing the government
We’ll probably see this within my lifetime, at the rate things are going.
Another way to describe the importance of a mass movement. If one person refuses to allow the banks to steal her home, she’s a protester. If a million people refuse to allow the banks to steal their homes…. they’re homeowners, and the sherrifs end up going after the banks.
Great post…light cast on a rarely explored corner of our economic dystopia, cockroaches scurry out. The tax system doesn’t seem to get much attention from the MSM–probably because they think it isn’t “sexy.”
The proof is everywhere – we need to TAX ALL CentaMillionaire$ and Billionaire$ out of EXISTENCE!
The Monied Elite are manipulaqting the Goverment and the IRS to divide and conquer the country!
The corruption of and by government is obvious to anyone who cares to admit that FACT!
The above quoted passage from the article ought be given much greater emphasis, imho, least the whole thing just become, or remain, a grand topic of conversation.
There is not a situation of ‘nothing changes’, there is change for the better or for the worse, because if those who wish to instigate change for the better do not act either singularly or collectively then for sure those who have, and continue to, instigated the present situation of wrong doing will not refrain if not restrained,the rot will permeate throughout.
A look at the charts showing percent of revenues to the Treasury from taxes paid by corporations shows that over the last 25 years that percentage has continuously declined. Taxes paid by individuals have made up the difference, mainly from higher FICA withholding. As a result, I believe 33 states, the latest being Texas, have adopted a small, 1.5 to 2.0 percent gross receipts tax on corporations, on a sliding scale depending on the type of business. The oldest is Washington state’s B&O tax, dating from the 1930s. The gross receipts tax is necessary, because these entities have large footprints in the states and demand services, and the state portion of corporate income taxes has dwindled along with the federal portion. The corporations are just too good at avoiding taxes using all the legal loopholes. Let’s be fair and say that corporations pay for employees’ health insurance, and that is a substantial social good reflected at the state and federal levels. But at the same time, governments need revenue to pay for the services corporations require and the impacts they make on an ongoing basis. This revenue has to come from somewhere.
I don’t think it’s fair to say that corporations paying health insurance is a good, or are doing it as a service. It is more likely that they are more than willing to pay this as a cost of doing business.
With this payoff, they ensure a system where people are strongly motivated to work for them for no other reason than that they are hesitant to put their selves or, even more-so, their dependent families at risk of losing everything in case of medical costs. This of course goes hand in hand with unreasonable medical costs in the first place. Many people who work for these companies loathe to do so, but feel trapped. Mission accomplished – a modern day Closing of the Commons.
Disgusting dereliction of duty.
The same thing is happening in Canada. The equivalent federal tax agency is walking away from the big offshore tax cheats. However it selectively and punitively audits left-wing charities only that criticize government. One egregious example was auditing a small group of bird watchers. Canada has a very repressive, verging on fascist, national government.
Interesting to see how the same tactics are used across the Five Eyes countries. Thankfully some citizens are paying attention.
Brilliant letter posted by the attorney in this US situation. Really clearly lays out what is happening or rather, not happening.
The IRS examines (aka audits) 1.0% of individual returns and 1.4% of corporate returns.
Of those examined corporate returns, the IRS “recommends” an additional $16.7B in taxes be paid. So if the IRS were to successfully prosecute those two cases mentioned above, they would nearly double the amount of additional taxes paid. And the IRS’s yearly budget is about $11B, so they could recover their whole yearly budget!
Audit rates on pages 22-23 of the following pdf:
http://www.irs.gov/pub/irs-soi/13databk.pdf
Another point to remember when you hear corporations whiiiiining and complaining about how egregious it is to be so “heavily and harshly” taxed blah blah blah is that they are LYING LIARS who LIE almost constantly.
My Dad always used the corporate tax argument about why Sainted Reagan was correct in lowering the taxes on the super wealthy and corporations – because it would “enable” them to create jobs. Bugger that for a joke.
In many cases, not only do the major corporations NOT pay ANY taxes At. All., they get all kinds of fees and incentives to be located somewhere. IOW, they are PAID by YOU and ME, the taxpayer (either at the local, state and/or fed level) to actual be there running their business… using the common goods, like roads, water, utilities, public safety services, etc etc… without paying any taxes and getting PAID to be there on top it.
It’s certainly a good gig if you can get it. The corporate-owned propaganda media plays the tune of how “staggering” the tax burden is for these corporations. It’s a bald-faced LIE. Don’t forget it. Don’t get fooled again.
Having 25 years of experience dealing with the IRS, for which several years were working for the Office of Chief Counsel, my opinion is that Attorney Jane Kim is right on point. It appears that the dirty little secret is that the private tax bar is now running the IRS…and Congress is well aware of it and its implications. These are the wealthiest and most influential business people in charge of the IRS.
It all began with the RRA 98 in which Congress encouraged the IRS to bring in outsiders to obtain new thoughts in managing and operating the IRS. However, since that time, the executives within the IRS simply go through a revolving door. They leave their big law/accounting firm position to spend a few years with the IRS. In that time, they learn the people and procedures, and meanwhile protect large taxpayers from the IRS. In time, they go back to their old jobs with more pay and better experience and count on the new IRS executives to protect their clients. It is clearly the scratch my back and I will scratch your mentality.
It is easy for the IRS not to do its job….budgetary reasons, lack of resources, little time on the statute of limitations, this is not the best case to take forward, litigation hazards (yes, the IRS, instead of doing its job with “fairness and equity” to all taxpayers, can think of legal weaknesses in their own position and then justify not going forward. The IRS executives will do this rather than put the tax issue in front of a tax court judge.) In addition, it is easy and better for all (at least Congress and the American public want to believe it) that the IRS did its job and examined a large taxpayer and came away without any adjustment in tax…giving the implications that the large taxpayer is complying with the law. The IRS is set up to go after the small taxpayer…not the big taxpayer.