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Offshore Tax Evasion

How does Loss of Revenue Hurt the US

Like many other countries of the world, each citizen is required to pay taxes which are used by the government in bringing about development in a country.  This study will examine the aspect of tax evasion and how it affects the economy of the United States of America. Additionally, this study will outline how the United States of America is hurt by loss of revenues which mostly is lost through tax evasion. Tax evasion is penalized through different ways especially through legal process and hence this study will shed more light on this matter. The aspect of tax evasion is not harmful only to the United States of America but the rest of the world is still affected and hence this study addresses how the United States of America can get other countries to stop offering tax haven. In general terms, all individuals are liable to tax in their residential places with all their world wide earnings

In order to avoid some misconception about the issue of offshore tax evasion and tax haven, it is very imperative to offer some brief definitions of the terms used in this study. Tax haven is a term that is normally used in denoting a state, territory, or a country where taxes are levied at very low rates or it is not levied at all. Individuals or companies can therefore find it profitable and attractive to move to these areas where there is no taxation. This usually leads to a process whereby governments start competing for taxation in the pursuit of attracting more and more investors. According to Meinzer (2008, p. 4), the term offshore is very confusing as its use is different especially when used in relation to tax evasion. In this respect, offshore refers to a place that is legally created and supported by nation states, freed, and overtly removed regulatory as well as sovereign control. For an offshore to exist within this definition, there must be a state that provides laws either deliberately or accidentally which reduce efficient regulation and taxation over the whole state. Tax evasion is equivalent to a crime committed by a person who breaches the laws ands rules set by a country. In this respect, all individuals in the United States of America are required by the law to pay taxes and hence tax evasion is a transgression that can be either administratively fined or criminally prosecuted depending on either quantitative or qualitative criteria. When these terms are combined, they give the general definition of offshore tax evasion. In this case, offshore tax evasion is the unlawful lack of payment of due taxes involved at any stage offshore judicial spaces.

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According to Delaney (2009), a report released in the year 2008 indicated by the United States of America looses approximately 0 billion in tax revenue. Currently, offshore tax evasion and havens hold trillions of dollars in the assets offered by people of other countries inclusive of the United States of America. It is therefore of critical importance to know and identify the extent to which the United States of America loses huge amounts of money in the name of tax evasion. Latour (2007, p. 91) outlines that the government usually bring about developments in a country from the money paid by tax payers and hence it is illegal for some people or companies to evade paying taxes. Levin and Coleman (2008, p. 1) reveal that, on average when estimating tax evasion by individuals in the United States of America, about to billion are lost annually. This indicates that this country is losing a lot of money through tax evasion and hence something needs to be done about it. The government is trying to make sure that offshore tax evasion is cracked down but this has not made significant impacts as even in the current situation the economic condition of this country is deteriorating partly because of failure of some people to pay taxes. In the year 2004, as depicted by Levin and Coleman (2008, p. 1), approximately million in U.S. tax revenues were reported to be lost as a result of corporate offshore pricing abuses. This is very huge amount of money that could lead to decreased economic power of the country.

The money that is paid by tax payers is used by the federal, local, and state government in paying the civil servants, in military power, and in importing essential products from other countries among others. These aspects bring about increased development in the United States of America and hence if some people do not participate in paying taxes, the country loses a lot of money. In May 2008, as depicted by Levin and Coleman (2008, p. 2), there was an international tax scandal where the United States of America arrested a private banker who was charged as having conspired with an American citizen to defraud the IRS of .2 million in taxes that were owed on #200 million of assets that were hidden in Switzerland and Liechtenstein offshore accounts. This is an indication that this country is losing large amounts of money through offshore tax scandals.

Economic consequences in the United States of America have been identified to be driven by the fact that many people do not like the aspect of paying taxes. It should be noted that large levels of progressivity usually discourages offshore tax evasion. This is because people are able to see the developments that are brought about by the amount of taxes they pay to the government. Kalin and Goldsmith (2007, p. 5) detail that, the United States of America is the superpower in the whole world in terms of economic power but it is threatened by the offshore tax evasion. This means that if this trend continues for sometime, America will collapse economically as many corporations will be evading paying taxes. The American economy is heavily affected by the illegal transaction of money where individuals and corporations are increasingly evading from paying taxes. This has been brought about by the aspect of tax haven where corporations deposit their incomes in countries where tax levy rate is relatively low or it is literally not there.

The Internal Revenue Service (IRS) has reported that the United States of America will not be able to venture into foreign businesses and other aspects if the increasing loss of money through offshore tax evasion continues. In support of this, as a percentage the Gross Domestic Product (GDP), in the year 1992 tax evasion in the United States of America reached 2.0% as compared to 1.6% in the year 1981. This indicates that this country’s gross domestic product is heavily affected by offshore tax evasion. Based on the figures provided by Internal Revenue Service (IRS), the offshore tax evasion in the United States of America is on the rise where within a period of 11 years, it has increased by 67%. It is therefore the role of the United States Justice Department, the Department of Commerce, and the Internal Revenue Service to make sure that they crack down offshore tax havens since they deprive large amounts of American money (Latour, 2007, p. 91).

Bankruptcy: Yes, Personal Income Taxes Can Be Discharged!

There are two guarantees in life: Taxes and Death. Believe it or not, certain income taxes can be discharged in bankruptcy. Since income taxes can be defeated that leaves only death to figure out. Maybe I’ll write an article on that someday. In the meantime, let’s focus getting rid of tax debt.

It is easier to discharge income tax than it is student loans. I remember the first time I heard that income taxes were dischargeable in bankruptcy. It was 8:00 am on a Thursday morning and only about 20 of us showed up for the lecture. Apparently no one wanted to wake up early for a lecture. That particular lecture is one that changed the way I practice bankruptcy law and may be the one lecture that has made the biggest difference in my practice. In order to discharge taxes in bankruptcy there are a couple of criteria that must be met.

All of the criteria that go into determining if taxes can be discharged are too numerous to discuss in this article. The first three criteria that I consider when determining if a client’s taxes are dischargeable are:

Were the taxes due more than 3 years ago?
Were the taxes filed more than 2 years ago?
Has the tax been assessed more than 8 months (240 days) ago?

Other criteria include, but are not limited to, issues surrounding the nature of the tax and if returns were filed fraudulently.

What Does It Mean To Have Taxes Due More Than 3 Years Ago?

Returns for a particular year are filed after that year (i.e. 2010 returns are filed in 2011). Traditionally the return isn’t required to be filed until April 15. Additionally, any income tax that is owed is also required to be paid on April 15. Therefore 2010 taxes become due on April 15, 2011. Consequently 2010 income tax won’t be able to be discharged until April 15, 2014 (2010 income taxes due April 15, 2011 plus 3 years). On April 15, 2011 debtors will be able to discharge 2007 income tax.

There are a couple of places where debtors can get messed up with the 3 year rule. First, sometimes the date, April 15, changes. This can be caused by April 15 landing on a Saturday or Sunday. In addition, 2010 taxes and returns are due on April 18, 2011 because the IRS decided so (actually it was because Congress took so long with particular legislation). Finally, filing for an extension will change the date to a later date than April 15. Make sure you tell you attorney if you filed an extension!

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What Does It Mean to Have the Returns Filed More Than 2 Years Ago?

First point I want to make about this rule: If you want to discharge taxes for a particular year but haven’t filed a return for that year, you will not be able to discharge the taxes.

The measuring date is from the day you file your bankruptcy petition. This means that if you recently filed outstanding returns they are most likely not going to be dischargeable. Take the date the bankruptcy was filed and subtract two years. If the return in question was filed before that date, you are fine. If it has been a while but not quite 2 years visit with your bankruptcy attorney to see if there is a way to delay filing the bankruptcy.

Combining the previous two rules: On May 1, 2011 a client comes to me and wants to discharge taxes from 2007 but didn’t file his 2007 returns until June 1, 2009.

I would tell the client to wait until June 2, 2011 and file for bankruptcy. That way the returns would be on file for 2 years and the taxes would have been owed for more than 3 years.

What Does It Mean To Have Taxes Assessed?

When a taxing authority assesses taxes what that really means is that the authority is “crystallizing” the liability to pay tax and the amount to be paid. In other words, when a tax is assessed the requirement to pay and the amount are determined. This is not determined when the return is filed. It is an internal procedure that a taxing authority applies. Normally it is done shortly after a return is filed, but not always.

Take for example the individual who files a return and is self-employed. If someone he did business for files a 1099 with the IRS after the due date the IRS is still going to expect taxes to be paid on the earned income. A tax may be assessed based on the late filing of the 1099 against the self-employed individual. The timing of the assessment will be determined based on when the Internal Revenue Service gets around to “auditing” the account. I have seen the Iowa Department of Revenue take a few years to adjust the assessment.

The timing of the assessment can be affected by tax returns being filed late; returns being audited; and offers and compromises being entered into with the taxing authority. The best way to determine when a tax was assessed is to contact the authority.

What Is The Nature Of Some Taxes That Are Not Dischargeable?

As previously discussed, income taxes can be dischargeable if certain criteria are met. Of course not all taxes are income tax. The most common type of taxes that are not income tax are called fiduciary taxes or trust tax. Fiduciary taxes include:

Unemployment Taxes
Withholding Taxes
Sales Tax

Fiduciary taxes are those that someone collects from a third party and pays on behalf of the third party.

As an example, when you go to the store you pay sales tax. The clerk merely serves to collect the tax you pay. Later, the clerk pays that on your behalf to the authority. More plainly stated, fiduciary taxes are collected from a third party (sales tax and income withhold tax, etc.) and held in trust. Since they are not the property of the debtor, the tax cannot be discharged.

The issues surrounding the discharge of tax in a bankruptcy can be very complicated. Even more complicated is how to deal with taxes in bankruptcy that cannot be discharged. It is important to seek competent legal advice from a bankruptcy attorney with experience in this area.

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Tax Attorneys- Interesting Roadmap For Law Tax

Any tax attorney or tax resolution professional will tell you that most of their clientele who owe taxes made the problem worse by procrastinating. It is a extremely human reaction to a scary problem. However, there’s an answer to “back taxes fear” and “failure to file” syndrome. What tax procrastinators need to be afraid of, isn’t the amount owed, but fear itself.

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Earnings taxes are utilized in most nations around the world. The tax systems alter greatly and can be progressive,proportional, or regressive, depending on the kind of tax. Comparison of tax rates around the planet is a tough and slightly subjective enterprise.Tax laws in most countries are extremely complex, and tax burden falls differently on different groups in each country and sub-national unit.

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Income taxes are utilized in most countries around the globe. The tax systems change considerably and can be progressive, proportionate, or regressive, dependent on the kind of tax. Comparison of tax rates around the globe is a troublesome and slightly subjective enterprise.Tax laws in most countries are highly complicated, and tax burden falls differently on different groups in each country and sub-national unit.

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A tax is a tax levied on the income of people or enterprises ( firms or other legal entities ). Varied income tax systems exist, with various levels of tax incidence. Revenue taxation can be progressive, proportionate, or regressive. When the tax is levied on the income of corporations, it is often called a corporate tax, corporate income tax, or profit tax.

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Income Tax Course Covers the Often Misunderstood Deduction of State and Local Taxes

A federally licensed tax professional is certain to encounter taxpayer confusion about the federal income tax deduction for state and local taxes. These taxes are federally deductible in the year they are paid to a state or local government. The tax period covered by the payment is irrelevant; all that matters for the federal deduction is when payment is made.

Most states have a personal income tax. Seven states have no individual income tax and two states tax only limited types of personal income. Tax practitioners normally prepare state tax returns in addition to federal returns. Some states have special licenses for tax return preparers. For example, a California tax preparer license is required to prepare tax returns in that state.

The due dates for payment of taxes usually extend into the subsequent calendar year. Likewise, the refund of state income tax overpayments occurs in the year following the tax year. The training in an income tax course conveys the implications of this that are not obvious to the general public. That is, the timing for state and local payments determines the year of federal tax deduction – regardless of the year credited by the state or local government.

For example, a fourth quarter state estimated tax payment by December 31 earns a federal tax deduction for that year. This is true even if some of that payment is later refunded in the next year. But paying the fourth quarter state estimated tax payment in early January nullifies a deduction for the year covered by the payment. That is because the year it is paid is all that matters for the federal tax deduction.

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One factor taught in ethics courses is that a taxpayer is prohibited from inflating a fourth quarter state estimated tax payment to an unreasonable level just to obtain a federal deduction. So tax professionals should take precautions about deducting state payments that are refunded in the first few months of the subsequent year.

In addition, almost all municipal entities tax the value of real property as well as personal property used for business activity. In many areas, bills mailed in the fall are not due until the following January. Payment before year-end entitles the taxpayer to a deduction for that year. But payment in January means claiming a the deduction on next year’s tax return.

Paying in the next year is sometimes the right strategy for taxpayers who are subject to the Alternative Minimum Tax and thus receive no tax advantage from paying extra local taxes. Advice on this matter is a valuable reason for a taxpayer to seek the services of someone with IRS tax preparer training.

Taxpayers who itemize deductions have the option of claiming either state and local income tax or sales tax for the year. Tax preparer software will calculate the largest deduction. In addition, taxpayers subject to the AMT may benefit from claiming the sales tax deduction even if it is lower than deducting state income tax.

Any taxpayer who takes a federal deduction for state income tax must later declare any state refund as federal income. But this does not happen to taxpayers who claim the state sales tax deduction instead of the state income tax deduction.

A deduction of state income tax includes both withholding and estimated tax payments paid in the federal tax year. It also includes any balance paid for a prior year. Deduction of sales tax is either the actual amount proven from receipts or an amount determined from a table based upon income. Tax professionals will remember to include the local component of sales tax in addition to the percentage charged by the state.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

The Big Tax Elephants In The Middle Of The Room

 There is a business meeting saying that describes the “elephant in the middle of the room.” The elephant represents an unpleasant task or situation, and even though the elephant is present and taking up a lot of space and oxygen at the meeting, no one wants to talk about the elephant or even acknowledge it exists. Therefore, the elephant gets ignored but the elephant (or the unpleasant task/situation) never goes away or stops smelling. That is the topic of today’s post, the big tax elephants in the room that no one wants to talk about.

 A recent New York Times article by Bruce Bartlett, that was summarized in the July 15, 2011 issue of The Week magazine, lamented that some high earning Americans paid no Federal income taxes last year, “Millionaires who pay no taxes.” According to Mr. Bartlett, 78,000 U.S. households with incomes between 1,000 and 3,000 paid no income taxes this past year, 24,000 tax filers with incomes from 3,000 to .2 million paid no Federal income taxes, and 3,000 tax filers with incomes over .2 million paid no Federal income taxes. He laments the fact that the tax code has so many credits, tax breaks, and loopholes for the wealthy that some high earners can legally get away without paying in Federal income taxes.

Does not seem fair, does it? High earning Americans not paying their “fair share” of taxes. But let’s see how much this could actually be if all these special treatments were removed:

- Let’s start with the first group of people, the 78,000 households. Let’s assume that their 2010 income was the average of the two ranges that Mr. Bartlett provides or 2,000. Let’s also assume that they had absolutely no deductions and that the 2,000 is their adjusted taxable income, a figure that is probably high.

Under the current tax code rates, each of these tax filers should have paid 7, 657 in Federal income tax if there was no credits, deductions, etc. available to them. Thus, in total they would have paid about .4 billion in Federal income taxes. This .4 billion is.2% of the Federal government’s 2011 likely spending level, hardly enough to balance the outlandish political class spending.

- Let’s move on to Mr., Bartlett’s second group and do the same calculations and estimation of an average income per tax filer in this group. Their tax bill, if there were no deductions, credits, tax breaks, etc. would be 5,489 per filer or about billion in total. billion comes to.3% of the Federal government’s 2011 likely spending level, hardly enough to balance the outlandish political class spending.

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- Let’s now do Mr. Bartlett’s final group, those earning over .2 million a year but who paid no income tax. Let’s start with an assumption that the average of those earning over .2 million was million. Going through the standard tax calculations and assuming that these people also had no special tax treatment, each one of them should have paid ,027,314 in Federal income taxes. In total, their tax bill would have come out to about .1 billion. .1 comes out to.08% of the Federal government’s 2011 likely spending level, hardly enough to balance the outlandish political class spending.

If you assume that those earning over .2 million had an average income level of million, not million, then they would have paid about .1 billion or about.1% of the Federal government’s 2011 likely spending level, hardly enough to balance the outlandish political class spending. If he average was million, the percentage of 2011 spending would have been.14%, still pretty small.

Should high earners get away without paying taxes? In most cases probably not. They enjoy all the benefits of what the government provides, e.g. national defense, infrastructure, government services, etc., they should pay their fair share. However, the point to take away from Mr.Barlett’s numbers is that even if all of these non-payers started paying according to the current tax rates, their total contribution would be about billion or less than 1% of the 2011 likely Federal government spending, hardly enough to balance the budget or offset the out-of-control political class spending.

Now, let’s finally get around to the elephants. If you buy the assumption that these high earners should not get away with paying no taxes since they enjoy all of the benefits of government without paying anything for it, what should we do with the other 45% of all American workers who also paid no Federal income taxes in 2010 since they also get a whole slew of tax breaks, credits, etc.? What would happen if they also started paying their “fair share:” 

There are currently 112.6 million households in the country.

Let’s roughly assume that 45% of these households paid no Federal income taxes in 2010 as many independent sources have estimated.

That means that 50.7 million households paid no Federal income taxes in 2010.

The average household income in the United States is estimated to be ,221.

Under the current IRS tax tables, an average household income should be paying ,680.50 in Federal income taxes.

If each of these non-payer households were actually accountable to the country and paid their fair share of taxes, the total would come out to about 0 billion a year. 0 billion is over 11% of the 2011 likely spending of the Federal government. This 11% is about 11 times more than what the high earners avoid paying as identified in Mr. Bartlett’s article. 

If it is not fair for the high earners to get the benefit of government without paying for it, then it is also unfair for you next door neighbor not to pay any taxes to get the same government benefits you get even though you pay Federal income taxes. No one in the political class wants to talk about these three elephants in the room:  

Elephant #1 -Taxing the rich, who paid no Federal income taxes last year, will come nowhere close to making a substantial dent in the out-of-control spending of the political class.

Elephant # 2 -If politicians are serious about reducing the annual spending deficit of the political class, they should eliminate tax breaks for ALL Americans, even those that are not making millions, since that would generate eleven times more revenue than just closing Mr. Bartlett’s high earner tax loopholes.

Elephant #3 – Even if the political class killed the second elephant and raised taxes for EVERY American who does not currently pay taxes, it would not come close to closing the spending gap of the political class. That is how out-of-control and dangerous their spending is.

The problem with having one elephant in the room, never mind three, is that they eventually get messy and smelly, the exact same words one could use to describe the horrendous and smelly financial hole that the political class has plopped the nation into the middle of. 

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