For those of you novice Minnows, like me, who want an insight into how those ‘Super Persons” Corporations play the Audit lottery, I highly recommend to you Jack Townsend’s recent post called Thoughts on the the Corporate Audit Lottery (2/11/12). Fair warning, this blog post may add to your cynical view of how the Tax game is played by those like GE who have the Tax Attorney resources to assure they have the lowest effective rate they can, like zero last year. In summary Jack says…..
In short, GE played the audit lottery with a transaction it knew would not prevail and was unwilling to open its kimono to tell the IRS and the courts (and the world) what it knew and when it knew it. It has been my experience that taxpayers — particularly well advised taxpayers such as GE — assess the risks and costs should the worst happen. GE must have known that it was at high risk of at least a 20% penalty if the IRS discovered and understood the transaction. In its cost / benefit analysis of claiming the illegal benefit of the transaction, GE must have considered the 20% penalty as just a potential cost for playing the audit lottery and found that potential cost acceptable given what it stood to gain if it won the lottery.
Finally, we can ask the question whether this is the conduct of a good U.S. taxpayer. GE is an icon of American industry. The question here is whether it is a good taxpayer or, in a broader, since a good citizen. And, a related question is how many times has GE won this lottery with positions that should not prevail and thus forced on the citizens of this country the costs of the taxes it owed but did not pay? This is not just to pick on GE, because as suggested above, this conduct has been common among sophisticated taxpayers.
I and commenters on this blog have spent a lot of time dealing with minnows who got caught up in the Government’s juggernaut on offshore accounts. By minnows, I mean those who had unreported offshore accounts but did not disguise them through mazes of foreign entities designed specifically to mislead. Those minnows who came forward took the 20% accuracy related penalty and 20% – 27.5% of their high balances (both noncompliant accounts and noncompliant foreign assets). How is GE’s conduct more morally appropriate than is the conduct of those minnows? GE took much more elaborate steps the hide the conduct than did these minnows. On any fairness scale, minnows should not be penalized for their conduct greater than GE has been penalized for its conduct in reporting the Castle Harbour transaction. Or, on any fairness scale, GE should be punished more.
Thanks for posting this look into the the shady world of tax avoidance. It certainly is in stark contrast to my tax problems, which have mainly to do with too many forms and worry that I might miss one or inadvertently make a mistake.
I have to admit I am not terribly surprised, being pretty cynical in such matters, but it is interesting to see how it is done. One would hope that given the fact that they are dealing given this sort of trickery, the IRS wouldn’t spend much time looking for mistakes in my tax form!
General Electric’s return reportedly runs about 57,000 pages.
Try to make sense of that, IRS. As Jack noted, the world’s best tax law firm exists within GE.
But really the fault lies with Congress. Most people cannot make sense of any more than a few pages, including Congress.
You are absolutely right about fault. 30 year Vet has been making that point too. They just can’t help themselves, and I don’t know how you change that.
When you look at the complexity of the code, combined with all the additional legal complexity of the various regulations and court rulings, it is no wonder that companies like GE with vast resources and a deep tax attorney bench approach each code as a Gordian Knot to be solved.
It is easy to say with pride, “we are a nation that lives by the rule of law,” and yet, when you look at the perversion of the system that comes about from the engineering process of the codes, which frankly arises out complexity as much as the unintended consequence of a well meaning statute, you have to reassess the value of this pride.
I try not to play the victim, and I am not anti business or anti capitalism, but there is definitely a difference strata of personhood when it comes to this game. Our ‘super persons’ have the advantage, and now with Citizen’s United, they will assure that they have a stronger voice than mine, a mere mortal person. 1000 years from now, historians will be writing about their legendary lobbying armies that captured the law and over threw Congress. Standing back now, this just looks like a festering cancer that exists as a parasite on the body politic and cannot be excised. At some point it kills the host.
Last week Treasury Secretary Tim Geithner said that the “most fortunate Americans” should pay more in taxes for the “privilege of being an American.”
Re the “privilege of being an American” If it’s really a privilege, why do they feel the need to repatriate people against their will?
He is talking about a well known secret: if you leave the country you don’t have to pay taxes. If you stay, then you do have to pay taxes.
I am not sure what you mean by repatriation.
Geithner himself worked abroad.
@M. Sorry, maybe a bit off-topic … I wasn’t referring to taxes.
The phrase “privilege of being an American” caught my attention. By “repatriation” I was referring to the confusion and suffering happening to people who relinquished their US citizenship years ago and are now caught up in a retroactive mess.
Based on the law of that time, we lost our US citizenship; we have long believed we are not USCs and don’t want to be and have no connection to the US. But due to retroactive changes in US law/policy, the US is considering these persons to be US citizens. We just wish they’d have left well enough alone.
In this context, I was just thinking of the irony, as Geithner was referring to the privilege of being an American citizen, generally a privilege is not something that you have to force on people or drag them kicking and screaming to.
Are they sending you a tax bill?
The US does not keep track of its citizens, as far as I know, so unless you have US sourced income, I would not worry about it.
Although, to be fair, US citizenship is highly sought after, worth hundreds of thousands of dollars to immigrants.
(So much so, that they are willingly paying the IRS FBAR fines, just so there is no potential mark on their citizenship application).
@M: “… US citizenship is … worth hundreds of thousands of dollars to immigrants.”
That’s a claim often made, but I’ve never seen it backed up with any real data. And the near-vertical climb of renunciation numbers even in the face of a $450 fee seems to place a negative value on US citizenship for some.
“So much so, that they are willingly paying the IRS FBAR fines, just so there is no potential mark on their citizenship application.”
My guess is that some folk already established in the US — family, kids at school, and so on — are paying this, through gritted teeth rather than willingly. Not all, though. Others are simply leaving in disgust. Or not arriving in the first place.
Watcher: “Others are simply leaving in disgust.”
There’s something special about going to a party where the host goes through your purse because he’s desperate for cash.
@M. No, no tax bill, no US source income. There’s other aspects to this retroactive citizenship, too, as US law currently overrides or may override the laws of one’s country in regards passports, fatca reporting, bank account refusal, etc, due to place of birth. I, and many others, have recently learned of the certificate of loss of nationality … I look forward to getting mine and the peace of mind of returning to the status quo. It’s really weird and bloody complicated that a foreign country can have any influence on your life.
Agreed, many people strongly desire US citizenship. The country has a lot to offer. I think it would be a pleasant place to live (although I have no desire to). But for me, it’s not my country and I just don’t like it’s suddenly entangling my life after 40 years.
And from the same geniuses who brought you FATCA we have …
Buy a House, Get a Visa: Congress Looks to Lure Foreign Nationals
I wonder if any rich Canadian, Brazilian or Chinese people have not heard of FATCA yet and will fall for this trap.
@M: I would happily give my US citizenship to an immigrant if I could.
I had every reason to believe my citizenship was “permanently and irrevocably” renounced when I became a Canadian citizen forty years ago.
I also believe there is a signed document confirming I renounced in Vancouver Consulate or DOS or wherever they store archived records They told me Privacy Act prevents them from even confirming if information is or isn’t there.
This reminds me of a friend who escaped from Estonia after the Soviet takeover. Her biggest problem was she couldn’t get a copy of her birth certificate. I wish my birth certificate didn’t exist! Any country who can treat its former and current citizens with such disdain is not a country I want to be connected with.
Canada has been good to me for 40 years. I think I’ve been good to Canada. That’s should be the end of the story.
“The US does not keep track of its citizens, as far as I know, so unless you have US sourced income, I would not worry about it
I wish I could share your confidence. Up until now the US has not kept track of its citizens abroad, probably because it would have been very complicated and costly to do. But information storage and processing is becoming cheaper and easier all the time. My daughter and I (both Canadian born, with Canadian passports) were identified by a border security guard as a US citizens 3 years ago because I inadvertently mentioned I was visiting my Mother. I have to assume we are now in their data bank, and next time I cross the border if I were to use my Canadian passport it will be interesting to see what happens.
Although, I’m not sure I’m willing to buy a plane ticket and then risk getting refused admission to the US, or drive the 6 hour drive to the nearest border crossing to find out.
In the future they will be able to keep track of a lot. The big question is what they will choose to do with it.
@CanuckDoc. Just because you could be US citizen, because your mother is a US citizen, does not mean you are one. You have to apply for that.
I would not take advice, especially financially related, from a border guard. They have other priorities, like classifying security threats. He probably gave that classification to you because it meant a lower security threat and therefore less paperwork for him.
@Blaze, you can use FOIA (Freedom of Information Act) to find out any info the govt may have about you, as long as it pertains to you. You have to go through that formality, by mentioning that statute. Otherwise, they won’t tell you.
@Watcher, there is actually a market for identities of citizens, particularly for valid social security numbers that undocumented immigrants can use to work. Check in the Latino/Mexican districts.
The benefits is that they pay into your Social Security, which might mean a small (tax-free) pension for you.
@pacifica, I live in the US. I would not call it pleasant to live in, but potentially very profitable.
I’m not sure where you get your information. According to the US government, I am a citizen. I don’t have to apply for it. So are my children.
In my situation, I was registered as “born abroad” at the consulate. I lived in the US as a child, and I have a SSN. After my mother moves us to the US, I travelled back and forth (my father was still in Canada) with my US “born abroad” papers and my Canadian birth certificate. But having lived in Canada since 1977, I consider myself as fully Canadian.
My daughter, after our unpleasantness at the border, got a US passport. She didn’t have to apply for citizenship, just for a passport.
It is one thing to suggest we should just ignore the rules, and another to deny they exist.
@M: “Watcher, there is actually a market for identities of citizens, particularly for valid social security numbers that undocumented immigrants can use to work. Check in the Latino/Mexican districts.”
Sure, but how does this back up the “US citizenship is worth hundreds of thousands of dollars” claim you made earlier? The black market price for a valid SSN is around $20.
@Watcher. Because the investor visa to the US requires the “investment” of several hundreds of thousands of dollars. That is to come legally.
Many of these investments are poorly designed, and they lose the money, but the immigrants write that off, in exchange for the visa.
@CanuckDoc, I did not know all that. The fact is that you (or your parents) had to apply for a SSN, and you had to apply for a passport. The evidence you used was your mother’s status, because you were born abroad.
You cannot waltz into the US system without a lot of paperwork, applications and documentation.
Had you not made the applications, the US would have had no record of you.
It is not an issue of following the rules, it is whose rules are you following? Yours, the US’s, if so which department, Canada’s?, or another party’s.
Where there is irrationality or conflicting rules (as is often the case with large, greedy, territorial and self-sustaining US bureaucracies), most people revert to personal rules that make sense to them. Ie. they personally override the irrational bureaucratic rules.
It is not ignoring the rules, it is not denying the rules exist, its acknowledging the rules, but choosing to disobey them, for good reasons.
It is a form of civil disobedience in the face of government incompetence.
@M: Thank you for posting the information about Freedom of Information. That is far more helpful and informative than a curt reply about the Privacy Act which I received from the Vancouver Consulate. It really does feel like Consulate is trying to prevent me (and others) from getting information about them. They simply ignored my question about how I could access personal information from 1973.
Do you know if records will have been obtained dating back to the 1970s?
Based on the information you gave, I found this about accessing personal information through Freedom of Information at DOS:
This says to submit access to information requests to DOS in Washington. Do you think that would be more effective than continuing to bash my head against a brick wall in Vancouver?
I am currently awaiting information from my Canadian citizenship file through an access to information request to CIC. After I receive that information, I will decide if I should formally pursue anything further through DOS.
@M: “Because the investor visa to the US requires the “investment” of several hundreds of thousands of dollars. That is to come legally. Many of these investments are poorly designed, and they lose the money, but the immigrants write that off, in exchange for the visa.”
But that’s still not citizenship. EB-5 is conditional “permanent” residency. The entire investment is not often written off. And interest in EB-5 has been remarkably low, often less than 1,000 applications per year. I can’t say I’m surprised. Few people with significant assets will want to voluntarily expose themselves to predatory and confiscatory US taxes.
Yes, follow the instructions, to the letter.
I got all the papers the INS had on me. It took 2 months, but they sent it on a CDROM, in PDF files. From 1977.