Tax Day is upon us once again. This year, the Internal Revenue Service (IRS) expects to receive 250 million tax returns and $2 trillion in revenue. And regardless of all the weeping and wailing that goes on, and all the anti-tax rhetoric we espouse, since the vast majority of us have our income taxes withheld by our employers, tax compliance in America is statistically very high – most of us pay what we owe, in full, and on time.
However, it is estimated that noncompliance with the tax code – tax evasion – will create a “tax gap” this year of approximately $300 billion to $500 billion. That’s money that is being fraudulently withheld from the U.S. Treasury due to under- or improperly reporting income, or overstating allowable deductions – generally by self-employed workers whose federal income taxes aren’t withheld.
But tax evasion is just one part of the problem for a government that traditionally wants to spend more than it takes in.
Almost as damaging to America’s balance sheet is tax avoidance – the legal means that large, multinational corporations and wealthy individuals employ when they channel money and profits to offshore tax havens in order to avoid paying their fair share of federal income tax. Loopholes in the tax code continually allow these players to game the system, costing the U.S. Treasury another estimated $150 billion per year.
However, these twin iniquities cannot be solved using similar methods. In the case of tax evasion, the IRS does have some new ammunition in its artillery and is girding for battle. But unless Congress acts to change tax law, the tax avoiders will likely be able to continue dodging their responsibilities – keeping oodles of tax-free income in offshore havens such as Bermuda, the Cayman, British Virgin and Cook islands, and dozens of other tax sanctuaries around the globe.
The IRS Goes After the Evaders
Currently, the IRS is planning to clamp down on tax evaders by utilizing some $350 million in new Internet investigative tools that will allow it to track, audit and analyze taxpayer behavior far beyond what is reported by the 80 percent of Americans who file their returns online.
According to new IRS rules, the agency can now collect a huge volume of personal information on a taxpayer’s digital activities – Facebook posts, eBay auctions, even credit card and electronic payment transaction records. In fact, by screening 32,000 categories of “metadata” and 1 million unique “attributes,” the tax agency’s super computers can create a virtual model of almost any taxpayer’s distinctive economic profile.
And by comparing an individual’s tax filing to all the ancillary data it can now mine with the goal of detecting instances of conflicting information, the IRS believes it can better target its enforcement mechanisms. If a person’s online, financial DNA doesn’t match what is reported on his or her tax forms, the auditors are alerted. Last year, in a test run of 1,500 tax preparers with histories of under-reporting, the agency managed to recover an extra $200 million.
Tax Avoiders Continue Their Free Ride
Conversely, because tax havens generally have secretive reporting laws, it is impossible to know exactly how much private money is tucked away offshore and out of sight. However, records recently unearthed by the International Consortium of Investigative Journalists has shed light on more than 120,000 offshore companies and trusts created by the world’s richest corporations and people.
It is now estimated that between $21 trillion and $32 trillion in private financial wealth – roughly equivalent to the size of the U.S. and Japanese economies, combined – sits in offshore accounts, far away from the taxman’s grasp.
And some of the depositors are well-known American-based companies: General Electric, Boeing, Pepco, Verizon, Wells Fargo, Goldman Sachs, Apple and Google, among others. Many of these corporations have paid little or no taxes over the past several years, because U.S. tax law allows them to “defer,” or delay indefinitely, paying taxes on what they claim are their “foreign” profits.
But it’s more than a little disingenuous for these giant firms to assert that these profits were made overseas, at all. Does the IRS truly believe, as reported in 2008 and confirmed by the Congressional Research Service, that American multinational companies earned 43 percent of their $940 billion in “overseas” profits that year in five, very small, tax-haven countries?
Or consider the case of the Cayman Islands’ notorious Ugland House, a small five-story building that is the official home to over 18,000 businesses. Who really believes that the funds stashed in these post-office-box, shell corporations are not profits that have been shifted from real business activities in countries like the United States to the Caymans, a tiny nation that has no corporate income tax?
Who Picks up the Tab?
The bottom line is that when the tax evaders and avoiders succeed, the rest of us have to pick up the slack. A new study by the Public Interest Research Group (PIRG) reveals that 83 of the nation’s top 100 publicly traded companies have created hundreds of phantom entities in order to avoid paying U.S. income taxes.
That means that the average U.S. taxpayer must contribute an extra $1,026, and the average U.S. small business, $3,067, to make up for the shortfall.
Thanks for Doing Your Share – and Everyone Else’s
In 1904, Supreme Court Justice Oliver Wendell Holmes said, “Taxes are the price we pay for a civilized society.”
So while you’re wrapping up your taxes this weekend, think of all the good that you’re doing when you pay your taxes – for yourself, your family, your country, indeed for civilization, itself.
And, of course, for all the cheaters and exploiters out there who either have less morals then you, or enough money to afford their armies of well-paid middlemen, accountants, lawyers and bankers who help them use the tax code for their own selfish, economic advantage.
Just don’t expect a thank you note.