Robin Hood tax

From Wikipedia, the free encyclopedia

 

Founded	2010
Focus	Political lobbying , marshaling grass roots support.
Location	United Kingdom and international
Area served	International
Method	New media, social networking and creative marketing
Website	The Robin Hood Tax

The Robin Hood tax commonly refers to a package of financial transaction taxes (FTT) proposed by a campaigning group of civil society non-governmental organizations (NGOs). Campaigners have suggested the tax could be implemented globally, regionally or unilaterally by individual nations.

Conceptually similar to the Tobin tax (which was proposed for foreign currency exchange only), it would affect a wider range of asset classes including the purchase and sale of bonds, commodities, mutual funds, stocks, unit trusts and derivatives such as futures and options.

A United Kingdom-based global campaign for the Robin Hood tax was launched on 10 February 2010 and is being run by a coalition of over 50 charities and organisations, including Christian Aid, Comic Relief and UNICEF. The UK government published a response favouring instead bank levies and a financial activities tax, citing the International Monetary Fund's report to the June 2010 G20 meeting, "A Fair and Substantial Contribution by the Financial Sector". The Robin Hood tax campaign also supports both a Bank levy and a Financial Activity Tax, saying they are agnostic about the chosen mechanism providing it involves a sizeable transfer of wealth from the financial sector to the needy. However most of their campaigning efforts have focussed on the FTT variant.

By autumn 2011 the Robin Hood campaign had gained considerable extra momentum and support from prominent opinion formers, with a proposal from the European Commission to implement an FTT tax at EU level set to enter the legislative pipeline. The proposal, supported by eleven EU member states, was approved in the European Parliament in December 2012, and by the Council of the European Union in January 2013. The formal agreement on the details of the EU FTT still need to be decided upon and approved by the European Parliament, but it is expected to go into effect by the beginning of 2018.

Early history of the terminology

In 2001, the charity War on Want released The Robin Hood Tax, an earlier proposal presenting their case for a currency transaction tax. In 2008, Italian treasury minister Giulio Tremonti introduced a windfall tax on the profits of energy companies. Tremonti called the tax a "Robin Hood Tax" as it was aimed at the wealthy with revenue to be used for the benefit of poorer citizens, though unlike the tax campaigned for in 2010 it was neither a transaction tax nor global nor aimed at banks.

The 2010 UK campaign

The campaign has proposed to set taxes on a range of financial transactions – the rate would vary but would average at about 0.05%. The tax would be applied to those trading in financial products such as stocks, bonds, currencies, commodities, futures, and options. It would affect individual investors, banks, hedge funds and other financial institutions. The campaign is sponsored by various prominent charities, aiming to raise money for International development, to tackle climate change and to protect public services.

The amount of money raised would depend on a number of different factors, including how many countries agree to the tax and the rate. In March 2010 the campaign's web site stated that: "$400 billion is our best estimate of what the tax will eventually raise from a range of rates on different transactions."

It has been proposed by the campaigning (lobbying) group that the money raised from this tax be split between domestic use and international aid. In an article co-authored by one of the campaign's most prominent advocates, Comic Relief founder Richard Curtis, it was suggested that approximately 50% of funds raised would be assigned to domestic use to protect public services and for governments to tackle poverty at home. Under the proposal, international efforts to reduce global poverty would receive another 25%, and the remaining 25% would go towards helping low income countries mitigate the effects of climate change and to reduce their own emissions.

The British campaign's launch was accompanied by an online poll on the charity's web site for the public to have a say on whether they support the tax. Initially, there was an apparent backlash with what appeared to be thousands of members of the public visiting the Robin Hood Tax to vote against the idea. However, on investigation it was claimed by the lobbying group that some five thousand of the "no" votes came from only two servers, one of them belonging to the investment bank Goldman Sachs.

The Robin Hood tax has been supported by some 350 economists in a letter written to the G20, including Joseph Stiglitz and Jeffery Sachs. Politicians supporting the tax include Angela Merkel, Nicolas Sarkozy and Katsuya Okada, Japan's foreign minister. According to a press release by the lobbying organisation, support has been forthcoming from the financial sector by prominent figures including George Soros, Warren Buffett and Lord Turner, chairman of the UK's Financial Services Authority.

At 5 February 2010 G7 meeting in Canada consensus was formed for some form of tax charged against large banks to cover the cost to government of insuring banks against future crisis. G7 officials planned to seek approval from other G20 nations at the June 2010 summit before progressing towards implementation.

While the movement supporting this or similar transaction taxes is international, the use of the "Robin Hood" theme has been especially prominent in Great Britain. An early thrust of the 2010 campaign involved grass roots supporters being encouraged to lobby MPs and the British Treasury for an implementation of the Robin Hood tax to be announced unilaterally as part of the UK's 24 March 2010 Budget. The British Chancellor refused to implement a Robin Hood tax, saying it would need to be co-ordinated internationally or else it would result in thousands of jobs being lost in the UK.

Another theatre for the campaign is the European Parliament, where in March 2010 a resolution was passed calling for progress to be made in identifying ways to set up a "Robin Hood" type tax.

Efforts in 2011 and later

Campaigning for the tax continued in 2011, with over 1000 economists signing a letter addressed to G20 finance ministers prior to their April 2011 meeting in Washington. Prominent signatories include Jeffery Sachs ; Nobel prize winners Joseph Stiglitz and Paul Krugman ; Harvard's Dani Rodrik and Cambridge's Ha-Joon Chang. A copy of the letter was also sent to Bill Gates, who has been commissioned by G20 chair and French president Nicolas Sarkozy to investigate new ways of funding the development of low income countries. The Guardian reported that staff from the Gates Foundation are also involved in international lobbying at G20 capitals.

The Robin Hood campaign has been attempting to build international public enthusiasm for the tax prior to the November G20 summit; in June the organisation reported the staging of campaigning events in 43 different countries. In late June the European Commission reversed its earlier opposition to the tax, proposing EU financial transaction tax be adopted within all member states of the European Union. Moves to pass the proposal through the legislative process are scheduled to commence in autumn 2011. A European version of the tax is projected to raise up to €30bn a year. ECB president Jean-Claude Trichet warned that implementing the tax could hurt Europe unless it could be rolled out globally. In August 2011 Sarkozy and German Chancellor Angela Merkel affirmed their support for the proposed European implementation. Great Britain's prime minister David Cameron remains opposed to the tax unless it can be implemented globally, meaning that a European implementation would likely have to be confined to the Eurozone not the whole EU.

As part of his September State of the Union speech, President of the European Commission José Manuel Barroso officially proposed an upgraded package of transaction taxes for adoption by the EU, now projected to raise up to €55bn ($75bn) per year. Also in September, Bill Gates presented his preliminary findings to the 2011 IMF & World Bank meeting in support of the Robin Hood tax. Gates's proposal is for a set of taxes which could raise between $48–250bn per year. Unlike Barroso's proposal, Gates is advocating the tax be adopted on a G20 wide bases rather than for just the EU, and Gate's plan is geared more towards raising funds for aid and development rather than for regular public spending and repairing government finances. Various British business, banks and economists such as Howard Davies have attacked the EU proposal saying it would be bad for growth and would harm the economy. Mark Lawson for the Robin Hood campaign responded to developments by saying "Game on!".

In October, Adbusters, the organisation responsible for sparking the Occupy movement, called for a global march in support of the Robin Hood tax, to take place on 29 October just before the 2011 G20 leaders summit. Marches did not occur in all "occupied" cities, but events involving several hundred protesters did take place at locations including Washington DC, Vancouver and Edinburgh.

Also in October the Robin Hood tax was endorsed by Pope Benedict XVI . In November, Rowan Williams, then Archbishop of Canterbury, re-affirmed his support of the Robin Hood campaign with an article in the Financial Times, saying the Vatican's strong backing for a FTT was "probably the most far-reaching" of their recent statements on reforming the International monetary system.

In November, Bill Gates presented his report to the 2011 G-20 Cannes summit, saying that a FTT tax could be an effective way to raise funds to tackle poverty in the developing world. However Gates also told the Financial Times that an FTT was only one option among many, admitting that in his opinion it was less important than tobacco and fuel taxes. At the G20 Summit there was strong support for the Robin Hood tax from Germany and France but opposition from other members including the US, Canada and Australia.

A few days after the G20 Summit, European finance leaders debated the possible introduction of a regional FTT tax. Again there was strong support from Germany and France but also from Austria, Belgium, Greece, Finland, Luxembourg, Spain, Portugal, while strong opposition comes from Britain, Sweden, Denmark, the Czech Republic, Romania and Bulgaria, with some members being sceptical especially about the value of implementing an FTT without including at least all 27 EU states. As European Union members remain divided over the issue, advocates of the FTT have said it could be implemented only within the eurozone, excluding countries like Sweden and the United Kingdom. France's president Hollande had committed to a Robin Hood tax in his 2012 election campaign. In a meeting just prior to the 2012 G8 summit he advised that he intends to uphold his commitment, though David Cameron repeated that Britain would veto the tax if attempts were made to impose it across the EU. Plans were made in France to implement the tax unilaterally, though these were superseded by an agreement to launch a Robin Hood tax at EU level. Eleven countries including France and Germany will take part, with the tax due to go live in 2014.

European Union financial transaction tax

EU Financial transaction tax

  Supporting EU countries

  Opposing EU countries

  Undecided Euro countries

  Undecided Non-Euro countries

The EU financial transaction tax (EU FTT) is a proposal made by the European Commission in September 2011 to introduce a financial transaction tax within the 27 member states of the European Union by 2014. The tax would only impact financial transactions between financial institutions charging 0.1% against the exchange of shares and bonds and 0.01% across derivative contracts. According to the European Commission it could raise €57 billion every year, of which around €10bn (£8.4bn) would go to Great Britain, which hosts Europe's biggest financial center. It is unclear whether a financial transaction tax is compatible with European law.

If implemented the tax must be paid in the European country where the financial operator is established. This "R plus I" (residence plus issuance) solution means the EU-FTT would cover all transactions that involve a single European firm, no matter if these transactions are carried out in the EU or elsewhere in the world. The scheme makes it impossible for say French or German banks to avoid the tax by moving their transactions offshore, unless they give up all their European customers.

Being faced with stiff resistance from some non-eurozone EU countries, particularly United Kingdom and Sweden, a group of eleven states began pursuing the idea of utilising enhanced co-operation to implement the tax in states which wish to participate. Opinion polls indicate that two-thirds of British people are in favour of some forms of FTT.

The proposal supported by the eleven EU member states, was approved in the European Parliament in December 2012, and by the Council of the European Union in January 2013. The formal agreement on the details of the EU FTT still need to be decided upon and approved by the European Parliament.

Celebrity involvement

The campaign involves a fictional film made by Richard Curtis and starring Bill Nighy, in which Bill Nighy plays a banker who is being questioned about the Robin Hood tax. He eventually admits that the tax would be a good idea and would not be too damaging to the financial sector.

United States financial transaction tax proposals

Revenue Estimate for US
Financial Transaction Tax

Tax base	Tax rate	Revenue estimate (US$ billion)
US stocks/equities	.5%	108–217
US bonds	.02%	26–52
US forex spot	.01%	8–16
US futures	.02%	7–14
US options	.5%	4–8
US swaps	.015%	23–46
US total		177–354

Different US financial transaction tax (US FTT) bills have been proposed in Congress since 2009. The main differences between the proposals has been the size of the tax, which financial transactions are taxed and how the new tax revenue is spent. The bills have proposed a .025%–.5% tax on stocks, .025%–.1% tax on bonds and .005%–.02% on derivatives with the funds going to health, public services, debt reduction, infrastructure and job creation. The House of Representatives has introduced since 2009 ten different US FTT related bills and the Senate has introduced four. The bills in the Senate have been variously sponsored by Tom Harkin (D-Iowa) or Bernie Sanders (I-Vermont). The bills in the House have been variously sponsored by Peter DeFazio (D-Oregon), John Conyers (D-Michigan) or a number of other Representatives.

The US FTT bills proposed by Rep. Peter DeFazio (D-Oregon) and Sen. Harkin (D-Iowa) have received a number of cosponsors in the Senate and House. The Let Wall Street Pay for the Restoration of Main Street Bill is an early version of their cosponsored US FTT bill which includes a tax on US financial market securities transactions. The bill suggests to tax stock transactions at a rate of 0.25%. The tax on futures contracts to buy or sell a specified commodity of standardised quality at a certain date in the future, at a market determined price would be 0.02%. Swaps between two firms and credit default swaps would be taxed 0.02%. The tax would only target speculators, since the tax would be refunded to average investors, pension funds and health savings accounts. Projected annual revenue is $150 billion per year, half of which would go towards deficit reduction and half of which would go towards job promotion activities. The day the bill was introduced, it had the support of 25 of DeFazio's House colleagues.

Comparison with the Tobin Tax

As of November 2011, the term "Tobin tax" is often used as a synonym for the Robin Hood tax. The Robin Hood FTT variant is similar to the original Tobin tax proposal but would apply to a broader set of financial sector transactions. Tobin suggested a form of currency transaction tax. This is a type of financial transaction tax, which taxes specific types of currency transaction. This term has been most commonly associated with the financial sector, as opposed to consumption taxes paid by consumers. 

Another difference between the Robin Hood FTT and the Tobin tax is that the Tobin tax was intended primarily to stabilise the economic market rather than generate revenue. Economists and analysts are now divided as to whether a small transaction tax would have a significant braking effect on the velocity of trades. According to the campaigning organisation, the Robin Hood Tax campaign presents the raising of revenue for domestic use and to fund international aid as a leading aim.

Evaluation and reception of the Robin Hood tax

Despite the early support for the FTT variant by leading statesmen such as Gordon Brown, by March 2010 The Financial Times had reported the international consensus now favoured a straightforward levy against various bank assets rather than a financial transaction tax. After the June 2010 G20 meeting of finance ministers in Busan, the G20 were no longer agreed even for the less radical global bank levy, with opposition led by Canada and Australia. Officials from EU, USA and UK said they were still planning to implement levies on their own banks, although the tax would likely be at a lower rate now to limit the risk of banks moving to jurisdictions that aren't planning on implementing the levy. Following on from the Pusan meeting but prior to the main 2010 G-20 Toronto summit, the European Union president Herman Van Rompuy announced that the EU had a common position in favour of both a Robin Hood style transaction tax and a bank levy which they would push for at the G20 gathering. However, according to the Canadian Embassy Newspaper there were divisions within the EU with some member countries such as the Czech Republic against any form of bank tax. No consensus for the tax emerged from the 2010 G20 summit. Prior to the 2011 G20 Summit in November, the Robin Hood campaign had become even more prominent, though it also provoked dozens of critical articles. Again it failed to achieve consensus at the 2011 summit.

General criticism

The proposed FTT could reduce the total volume traded in financial products, with negative consequences for employment. While this may reduce employment in brokerages and other areas of the securities industry, a further consequence could be unemployment outside of the financial sector. Schwabish (2005) examined the potential effects of introducing a stock transaction (or "transfer") tax in a single city (New York) on employment not only in the securities industry, but also in the supporting industries. A financial transactions tax could lead to job losses also in non-financial sectors of the economy through the so-called multiplier effect forwarding in a magnified form any taxes imposed on Wall Street employees through their reduced demand to their suppliers and supporting industries. The author estimated the ratios of financial- to non-financial job losses of between 10:1 to 10:4, that is "a 10 percent decrease in securities industry employment would depress employment in the retail, services, and restaurant sectors by more than 1 percent; in the business services sector by about 4 percent; and in total private jobs by about 1 percent."

Other unintended consequences of an FTT could include a reduction in professional market participants such as market makers who stand ready to buy or sell at prevailing prices. This could impact the orderly and efficient operation of markets, including the price discovery process. It has been suggested that such reforms could lead to reduced liquidity, wider bid / offer spreads, and greater volatility.

According to the United States Chamber of Commerce, the tax could double the cost of certain financial transactions and could cause the Dow Jones Industrial Average to fall by 12.5%.

Mike Devereux, director of the Centre for Business Taxation at Oxford University, has argued the tax would effectively be a stealth tax as the banks would pass all costs on to their customers, with no guaranteed transparency about who exactly would bear the costs. Economics writer Tim Worstall has made similar arguments, stating the tax would ultimately be paid not by the banks but by ordinary consumers and workers. Worstall also argues that overall an FTT tax would reduce tax revenue, so would fail to help provide extra money for helping the poor.

In 2011 Oxfam banned a pensioner from one of its stores as he was incensed by the organisation's support for the tax, feeling that it could reduce the income of small-time pensioners and shareholders like himself.

By May 2013, with the EU due to launch a Robin Hood tax in 2014, there has been considerable caution expressed from commentators within nations due to implement the tax, such as Germany. For example, Jens Weidmann, president of the Bundesbank, warned that in its current form the tax would harm Europe's repo market, with knock on effects to the real economy as some firms would likely find themselves less able to borrow.

Criticism against implementation at national or regional level only

If implemented just at EU level rather than globally, critics have stated the negative consequences would be felt disproportionately in Britain, with economists such as Tim Congdon estimating an FTT could result in over 100,000 job losses from London's financial sector.

Andrew Tyrie, Chairman of the UK Treasury Select Committee, has listed 17 problems with the FTT tax, including a loss of overall tax revenue for Britain. Critics have conceded that the FTT would reduce the overall volume of transactions, especially those originating from High-frequency trading, but deny that it would reduce the risk of further crises in the financial sector.

When a 0.5% financial transaction tax was implemented in Sweden, over 50% of trades in Swedish equities moved to London. On 15 April 1990, the tax on fixed-income securities was abolished. It is notable that the tax imposed an increased cost on government borrowing, and this may have influenced the decision to repeal the tax.

Public opinion

A recent Eurobarometer poll of more than 27,000 people published in January 2011 found that Europeans are strongly in favour of a financial transaction tax by a margin of 61 to 26 per cent. Of those, more than 80 per cent agree that if global agreement cannot be reached – an FTT should, initially, be implemented in just the EU. Support for an FTT, in the UK, is 65 per cent. Another survey published earlier by YouGov suggests that more than four out of five people in the UK, France, Germany, Spain and Italy think the financial sector has a responsibility to help repair the damage caused by the economic crisis. The poll also indicated strong support for an FTT among supporters of all the three main UK political parties. Despite the arguments that an EU only FTT tax would hurt Great Britain, other 2011 polls have suggested about two-thirds of the British public support the Robin Hood tax campaign.

Tax avoidance

From Wikipedia, the free encyclopedia

Tax avoidance is the legal usage of the tax regime in a single territory to one's own advantage to reduce the amount of tax that is payable by means that are within the law. Tax sheltering is very similar, although unlike tax avoidance tax sheltering is not necessarily legal. Tax havens are jurisdictions which facilitate reduced taxes.

While forms of tax avoidance which use tax laws in ways not intended by governments may be considered legal, it is almost never considered moral in the court of public opinion and rarely in journalism. Many corporations and businesses which take part in the practice experience a backlash, either from their active customers or online. Conversely, benefiting from tax laws in ways which were intended by governments is sometimes referred to as "tax planning". The World Bank's World Development Report 2019 on the future of work supports increased government efforts to curb tax avoidance as part of a new social contract focused on human capital investments and expanded social protection.

Tax mitigation, "tax aggressive", "aggressive tax avoidance" or "tax neutral" schemes generally refer to multi-territory schemes that fall into the grey area between commonplace and well-accepted tax avoidance (such as purchasing municipal bonds in the United States) and evasion, but are widely viewed as unethical, especially if they are involved in profit-shifting from high-tax to low-tax territories and territories recognised as tax havens. Since 1995, trillions of dollars have been transferred from OECD and developing countries into tax havens using these schemes.

Laws known as a General Anti-Avoidance Rule (GAAR) statutes which prohibit "tax aggressive" avoidance have been passed in several countries and regions including Canada, Australia, New Zealand, South Africa, Norway, Hong Kong and the United Kingdom. In addition, judicial doctrines have accomplished the similar purpose, notably in the United States through the "business purpose" and "economic substance" doctrines established in Gregory v. Helvering and in the UK through the Ramsay case. Though the specifics may vary according to jurisdiction, these rules invalidate tax avoidance which is technically legal but not for a business purpose or in violation of the spirit of the tax code. Related terms for tax avoidance include tax planning and tax sheltering.

The term avoidance has also been used in the tax regulations of some jurisdictions to distinguish tax avoidance foreseen by the legislators from tax avoidance which exploits loopholes in the law such as like-kind exchanges. The United States Supreme Court has stated that "The legal right of an individual to decrease the amount of what would otherwise be his taxes or altogether avoid them, by means which the law permits, cannot be doubted."

Tax evasion, on the other hand, is the general term for efforts by individuals, corporations, trusts and other entities to evade taxes by illegal means. Both tax evasion and some forms of tax avoidance can be viewed as forms of tax noncompliance, as they describe a range of activities that are unfavorable to a state's tax system.

Anti-avoidance measures

An anti-avoidance measure is a rule that prevents the reduction of tax by legal arrangements, where those arrangements are put in place purely to reduce tax, and would not otherwise be regarded as a reasonable course of action.

Methods

Country of residence

A company may choose to avoid taxes by establishing their company or subsidiaries in an offshore jurisdiction (see offshore company and offshore trust). Individuals may also avoid tax by moving their tax residence to a tax haven, such as Monaco, or by becoming a perpetual traveler. They may also reduce their tax by moving to a country with lower tax rates.

However, a small number of countries tax their citizens on their worldwide income regardless of where they reside. As of 2012, only the United States and Eritrea have such a practice, whilst Finland, France, Hungary, Italy and Spain apply it in limited circumstances. In cases such as the US, taxation cannot be avoided by simply transferring assets or moving abroad.

The United States is unlike almost all other countries in that its citizens and permanent residents are subject to U.S. federal income tax on their worldwide income even if they reside temporarily or permanently outside the United States. U.S. citizens therefore cannot avoid U.S. taxes simply by emigrating from the U.S. According to Forbes magazine some citizens choose to give up their United States citizenship rather than be subject to the U.S. tax system; but U.S. citizens who reside (or spend long periods of time) outside the U.S. may be able to exclude some salaried income earned overseas (but not other types of income unless specified in a bilateral tax treaty) from income in computing the U.S. federal income tax. The 2015 limit on the amount that can be excluded is US$100,800. In addition, taxpayers can exclude or deduct certain foreign housing amounts. They may also be entitled to exclude from income the value of meals and lodging provided by their employer. Some American parents don’t register their children’s birth abroad with American authorities, because they do not want their children to be required to report all earnings to the IRS and pay American taxes for their entire lives, even if they never visit the United States.

Double taxation

Most countries impose taxes on income earned or gains realized within that country regardless of the country of residence of the person or firm. Most countries have entered into bilateral double taxation treaties with many other countries to avoid taxing nonresidents twice—once where the income is earned and again in the country of residence (and perhaps, for U.S. citizens, taxed yet again in the country of citizenship)—however, there are relatively few double-taxation treaties with countries regarded as tax havens. To avoid tax, it is usually not enough to simply move one's assets to a tax haven. One must also personally move to a tax haven (and, for U.S. citizens, renounce one's citizenship) to avoid tax.

Legal entities

Without changing country of residence (or, if a U.S. citizen, without giving up one's citizenship), personal taxation may be legally avoided by the creation of a separate legal entity to which one's property is donated. The separate legal entity is often a company, trust, or foundation. These may also be located offshore, such as in the case of many private foundations. Assets are transferred to the new company or trust so that gains may be realized, or income earned, within this legal entity rather than earned by the original owner. If assets are later transferred back to an individual, then capital gains taxes would apply on all profits. Also income tax would still be due on any salary or dividend drawn from the legal entity. 

For a settlor (creator of a trust) to avoid tax there may be restrictions on the type, purpose and beneficiaries of the trust. For example, the settlor of the trust may not be allowed to be a trustee or even a beneficiary and may thus lose control of the assets transferred and/or may be unable to benefit from them.

Legal vagueness

Tax results depend on definitions of legal terms which are usually vague. For example, vagueness of the distinction between "business expenses" and "personal expenses" is of much concern for taxpayers and tax authorities. More generally, any term of tax law has a vague penumbra, and is a potential source of tax avoidance.

Tax shelters

Tax shelters are investments that allow, and purport to allow, a reduction in one's income tax liability. Although things such as home ownership, pension plans, and Individual Retirement Accounts (IRAs) can be broadly considered "tax shelters", insofar as funds in them are not taxed, provided that they are held within the Individual Retirement Account for the required amount of time, the term "tax shelter" was originally used to describe primarily certain investments made in the form of limited partnerships, some of which were deemed by the U.S. Internal Revenue Service to be abusive.

The Internal Revenue Service and the United States Department of Justice have recently teamed up to crack down on abusive tax shelters. In 2003 the Senate's Permanent Subcommittee on Investigations held hearings about tax shelters which are entitled U.S. tax shelter industry: the role of accountants, lawyers, and financial professionals. Many of these tax shelters were designed and provided by accountants at the large American accounting firms.

Examples of U.S. tax shelters include: Foreign Leveraged Investment Program (FLIP) and Offshore Portfolio Investment Strategy (OPIS). Both were devised by partners at the accounting firm, KPMG. These tax shelters were also known as "basis shifts" or "defective redemptions." 

Prior to 1987, passive investors in certain limited partnerships (such as oil exploration or real estate investment ventures) were allowed to use the passive losses (if any) of the partnership (i.e., losses generated by partnership operations in which the investor took no material active part) to offset the investors' income, lowering the amount of income tax that otherwise would be owed by the investor. These partnerships could be structured so that an investor in a high tax bracket could obtain a net economic benefit from partnership-generated passive losses.

In the Tax Reform Act of 1986 the U.S. Congress introduced the limitation (under 26 U.S.C. § 469) on the deduction of passive losses and the use of passive activity tax credits. The 1986 Act also changed the "at risk" loss rules of 26 U.S.C. § 465. Coupled with the hobby loss rules (26 U.S.C. § 183), the changes greatly reduced tax avoidance by taxpayers engaged in activities only to generate deductible losses.

Transfer mispricing

Fraudulent transfer pricing, sometimes called transfer mispricing, also known as transfer pricing manipulation, refers to trade between related parties at prices meant to manipulate markets or to deceive tax authorities. 

For example, if company A, a food grower in Africa, processes its produce through three subsidiaries: X (in Africa), Y (in a tax haven, usually offshore financial centers) and Z (in the United States). Now, Company X sells its product to Company Y at an artificially low price, resulting in a low profit and a low tax for Company X based in Africa. Company Y then sells the product to Company Z at an artificially high price, almost as high as the retail price at which Company Z would sell the final product in the U.S.. Company Z, as a result, would report a low profit and, therefore, a low tax. About 60% of capital flight from Africa is from improper transfer pricing. Such capital flight from the developing world is estimated at ten times the size of aid it receives and twice the debt service it pays.

The African Union reports estimates that about 30% of Sub-Saharan Africa's GDP has been moved to tax havens. Solutions include corporate “country-by-country reporting” where corporations disclose activities in each country and thereby prohibit the use of tax havens where real economic activity occurs.

Tax avoiders

United Kingdom

HMRC, the UK tax collection agency, estimated that the overall cost of tax avoidance in the UK in 2016-17 was £1.7 billion, of which £0.7 billion was loss of income tax, National Insurance contributions and Capital Gains Tax. The rest came from loss of Corporation Tax, VAT and other direct taxes. This compares to the wider tax gap (the difference between the amount of tax that should, in theory, be collected by HMRC, against what is actually collected) in that year of £33 billion.

Figures published by the Tax Justice Network show that the UK had one of the lowest rates of tax losses due to profit shifting by multinational companies, with the fourth lowest rate out of 102 countries studied. According to the figures, the UK lost £1 billion from profit shifting, around 0.04% of its GDP, coming behind Botswana (0.02%), Ecuador (0.02%) and Sweden (0.004%).

Large companies accused of tax avoidance

In 2008 it was reported by Private Eye that Tesco utilized offshore holding companies in Luxembourg and partnership agreements to reduce corporation tax liability by up to £50 million a year. Another scheme previously identified by Private Eye involved depositing £1 billion in a Swiss partnership, and then loaning out that money to overseas Tesco stores, so that profit can be transferred indirectly through interest payments. This scheme is reported to remain in operation and is estimated to be costing the UK exchequer up to £20 million a year in corporation tax.

In 2011, ActionAid reported that 25% of the FTSE 100 companies avoided taxation by locating their subsidiaries in tax havens. This increased to 98% when using the stricter US Congress definition of tax haven and bank secrecy jurisdictions. In 2016, it was reported in the Private Eye current affairs magazine that four out of the FTSE top 10 companies paid no corporation tax at all.

Tax avoidance by corporations came to national attention in 2012, when MPs singled out Google, Amazon.com and Starbucks for criticism. Following accusations that the three companies were diverting hundreds of millions of pounds in UK profits to secretive tax havens, there was widespread outrage across the UK, followed by boycotts of products by Google, Amazon.com and Starbucks. Following the boycotts and damage to brand image, Starbucks promised to move its tax base from the Netherlands to London and to pay HMRC £20million, but executives from Amazon.com and Google defended their tax avoidance as being within the law. 

Google has remained the subject of criticism in the UK regarding their use of the 'Double Irish', Dutch Sandwich and Bermuda Black Hole tax avoidance schemes. Similarly, Amazon remains the subject of criticism across the UK and EU for its tax avoidance, with a 'sweetheart deal' between Luxembourg and Amazon.com enabling the American company to pay little to no corporate tax across Europe declared illegal in 2015. PayPal, EBay, Microsoft, Twitter and Facebook have also been found to be using the Double Irish and Dutch Sandwich schemes. Up to 1,000 individuals in the same year were also discovered to be using K2 to avoid tax.

Other UK active corporations mentioned in relation to tax avoidance in 2015, particularly the Double Irish, Dutch Sandwich and Bermuda Black Hole:

• Technology: Apple, Microsoft, PayPal, EBay, Intel, Yahoo!, Facebook, Uber, Netflix, Hewlett-Packard, IBM, and Twitter
• Retail: Boots (who moved their registered office to a Swiss letterbox), Kellogg's, and TopShop
• Football clubs: Manchester United, Birmingham City, Coventry City and Cheltenham Town.
• News: Daily Mail

Other corporations mentioned in relation to tax avoidance in later years have been Vodafone, AstraZeneca, SABMiller, GlaxoSmithKline and British American Tobacco.

Tax avoidance has not always related to corporation tax. A number of companies including Tesco, Sainsburys, WH Smith, Boots and Marks and Spencer used a scheme to avoid VAT by forcing customers paying by card to unknowingly pay a 2.5% 'card transaction fee', though the total charged to the customer remained the same. Such schemes came to light after HMRC litigated against Debenhams over the scheme during 2005.

General anti-avoidance rule

Since the late 1990s, New Labour consulted on a "general anti-avoidance rule" (GAAR) for taxation, before deciding against the idea. By 2003, public interest in a GAAR surged as evidence of the scale of tax avoidance used by individuals in the financial and other sectors became apparent, though in its 2004 Budget the Labour Government announced a new "disclosure regime" as an alternative, whereby tax avoidance schemes would be required to be disclosed to the revenue departments.

In December 2010, the new Coalition government commissioned a report which would consider whether there should be a general anti-avoidance rule for the UK, which recommended that the UK should introduce such a rule, which was introduced in 2013. The rule prevents the reduction of tax by legal arrangements, where those arrangements are put in place purely to reduce tax, and would not otherwise be regarded as a reasonable course of action.

Following the Panama Papers leak, Private Eye, The Guardian and other British media outlets noted that Edward Troup, who became executive chair of HM Revenue and Customs, worked with Simmons & Simmons in 2004 representing corporate tax havens and opposed the GAAR in 1998.

Historical tax avoidance

Window tax

Avoiding the window tax in England

 

One historic example of tax avoidance still evident today was the payment of window tax. It was introduced in England and Wales in 1696 with the aim of imposing tax on the relative prosperity of individuals without the controversy of introducing an income tax. The bigger the house, the more windows it was likely to have, and the more tax the occupants would pay. Nevertheless, the tax was unpopular, because it was seen by some as a "tax on light" (leading to the phrase daylight robbery) and led property owners to block up windows to avoid it. The tax was repealed in 1851.

Deliberate roof destruction

Other historic examples of tax avoidance were the deliberate destructions of roofs in Scotland to avoid substantial property taxes. The roof of Slains Castle was removed in 1925, and the building has deteriorated since. The owners Fetteresso Castle (now restored) deliberately destroyed their roof after World War II in protest at the new taxes.

United States

An IRS report indicates that, in 2009, 1,470 individuals earning more than $1,000,000 annually faced a net tax liability of zero or less. Also, in 1998 alone, a total of 94 corporations faced a net liability of less than half the full 35% corporate tax rate and the corporations Lyondell Chemical, Texaco, Chevron, CSX, Tosco, PepsiCo, Owens & Minor, Pfizer, JP Morgan, Saks, Goodyear, Ryder, Enron, Colgate-Palmolive, Worldcom, Eaton, Weyerhaeuser, General Motors, El Paso Energy, Westpoint Stevens, MedPartners, Phillips Petroleum, McKesson and Northrup Grumman all had net negative tax liabilities. Additionally, this phenomenon was widely documented regarding General Electric in early 2011.

Furthermore, a Government Accountability Office study found that, from 1998 to 2005, 55 percent of United States companies paid no federal income taxes during at least one year in a seven-year period it studied. A review in 2011 by Citizens for Tax Justice and the Institute on Taxation and Economic Policy of companies in the Fortune 500 profitable every year from 2008 through 2010 stated these companies paid an average tax rate of 18.5% and that 30 of these companies actually had a negative income tax due.

In 2012, Hewlett-Packard lost a lawsuit with the IRS over a "foreign tax credit generator" which was engineered by a division of AIG. Al Jazeera also wrote in 2012 that "Rich individuals and their families have as much as $32 trillion of hidden financial assets in offshore tax havens, representing up to $280bn in lost income tax revenues ... John Christensen of the Tax Justice Network told Al Jazeera that he was shocked by 'the sheer scale of the figures'. ... 'We're talking about very big, well-known brands – HSBC, Citigroup, Bank of America, UBS, Credit Suisse ... and they do it knowing fully well that their clients, more often than not, are evading and avoiding taxes.' Much of this activity, Christensen added, was illegal."

As a result of the tax sheltering, the government responded with Treasury in Treasury Department Circular 230. In 2010, the Health Care and Education Reconciliation Act of 2010 codified the "economic substance" rule of Gregory v. Helvering (1935).

The US Public Interest Research Group said in 2014 that the United States loses roughly $184 billion per year due to corporations such as Pfizer, Microsoft and Citigroup using offshore tax havens to avoid paying US taxes. According to PIRG:

• Pfizer paid no US income taxes 2010–2012, despite earning $43 billion. The corporation received more than $2 billion in federal tax refunds. In 2013, Pfizer operated 128 subsidiaries in tax havens and had $69 billion offshore which could not be collected by the Internal Revenue Service (IRS);
• Microsoft maintains five tax haven subsidiaries and held $76.4 billion overseas in 2013, thus saving the corporation $24.4 billion in taxes;
• Citigroup maintained 21 subsidiaries in tax haven countries in 2013, and kept $43.8 billion in offshore jurisdictions, thus saving the corporation an additional $11.7 billion in taxes.

Public opinion

Tax avoidance may be considered to be the dodging of one's duties to society, or alternatively the right of every citizen to structure one's affairs in a manner allowed by law, to pay no more tax than what is required. Attitudes vary from approval through neutrality to outright hostility. Attitudes may vary depending on the steps taken in the avoidance scheme, or the perceived unfairness of the tax being avoided.

In 2008, the charity Christian Aid published a report, Death and taxes: the true toll of tax dodging, which criticised tax exiles and tax avoidance by some of the world's largest companies, linking tax evasion to the deaths of millions of children in developing countries. However the research behind these calculations has been questioned in a 2009 paper prepared for the UK Department for International Development. According to the Financial Times there is a growing trend for charities to prioritise tax avoidance as a key campaigning issue, with policy makers across the world considering changes to make tax avoidance more difficult.

In 2010, tax avoidance became a hot-button issue in the UK. An organisation, UK Uncut, began to encourage people to protest at local high-street shops that were thought to be avoiding tax, such as Vodafone, Topshop and the Arcadia Group.

In 2012, during the Occupy movement in the United States, tax avoidance for the 99% was proposed as a protest tool.

Prem Sikka, Professor of Accounting at the Essex Business School (University of Essex) and scientific advisor of the Tax Justice Network pointed to a discrepancy between the Corporate Social Responsibility claims of multinational companies and “their internal dynamics aimed at maximising their profits through things like tax avoidance”. He wrote in an article commenting the Lux Leaks publications: “Big corporations and accountancy firms are engaged in organised hypocrisy.”

Fair Tax Mark

As a response to public opinion regarding tax avoidance, the Fair Tax Mark was established in the UK during 2014 as an independent certification scheme to identify companies which pay taxes "in accordance with the spirit of all tax laws" and not to use options, allowances, or reliefs, or undertake specific transactions, "that are contrary to the spirit of the law". The Mark is operated by a not-for-profit community benefit society. 

Awardees of this mark include The Co-op, SSE, Go-Ahead Group, Lush Cosmetics, Marshalls, several large regional co-operatives (East of England, Midcounties, Scotmid) and The Phone Co-op.

Government and judicial response

Countries with politicians, public officials or close associates implicated in the Panama Papers leak on April 15, 2016

 

Tax avoidance reduces government revenue, so governments with a stricter anti-avoidance stance seek to prevent tax avoidance or keep it within limits. The obvious way to do this is to frame tax rules so that there is a smaller scope for avoidance. In practice this has not always been achievable and has led to an ongoing battle between governments amending legislation and tax advisors finding new scope/loopholes for tax avoidance in the amended rules.

To allow prompter response to tax avoidance schemes, the US Tax Disclosure Regulations (2003) require prompter and fuller disclosure than previously required, a tactic which was applied in the UK in 2004. 

Some countries such as Canada, Australia, United Kingdom and New Zealand have introduced a statutory General Anti-Avoidance Rule (or General Anti-Abuse Rule, GAAR). Canada also uses Foreign Accrual Property Income rules to obviate certain types of tax avoidance. In the United Kingdom many provisions of the tax legislation (known as "anti-avoidance" provisions) apply to prevent tax avoidance where the main object (or purpose), or one of the main objects (or purposes), of a transaction is to enable tax advantages to be obtained. 

In the United States, the Internal Revenue Service distinguishes some schemes as "abusive" and therefore illegal. The Alternative Minimum Tax was developed to reduce the impact of certain tax avoidance schemes. Furthermore, while tax avoidance is in principle legal, if the IRS in its sole judgment determines that tax avoidance is the 'principal purpose' for an expatriation attempt, 'covered expat' status will be applied to the requester, thereby forcing an expatriation tax on worldwide assets to be paid as a condition of expatriation. The IRS presumes a principal purpose of tax avoidance if a taxpayer requesting expatriation has a net worth of $622,000 or more, or has had more than $124,000 in average annual net income tax over the 5 tax years ending before the date of expatriation.

United Kingdom

In the UK, judicial doctrines to prevent tax avoidance began in IRC v Ramsay (1981) which decided that where a transaction has pre-arranged artificial steps that serve no commercial purpose other than to save tax, the proper approach is to tax the effect of the transaction as a whole. This is known as the Ramsay principle and this case was followed by Furniss v. Dawson (1984) which extended the Ramsay principle. This approach has been rejected in most Commonwealth jurisdictions even in those where UK cases are generally regarded as persuasive. After two decades, there have been numerous decisions, with inconsistent approaches, and both the Revenue authorities and professional advisors remain quite unable to predict outcomes. For this reason this approach can be seen as a failure or at best only partly successful. 

In the judiciary, different judges have taken different attitudes. As a generalisation, for example, judges in the United Kingdom before the 1970s regarded tax avoidance with neutrality; but nowadays they may regard aggressive tax avoidance with increasing hostility.

In the UK in 2004, the Labour government announced that it would use retrospective legislation to counteract some tax avoidance schemes, and it has subsequently done so on a few occasions, notably BN66. Initiatives announced in 2010 suggest an increasing willingness on the part of HMRC to use retrospective action to counter avoidance schemes, even when no warning has been given.

The UK Government has pushed the initiative led by the Organisation for Economic Co-operation and Development (OECD) on base erosion and profit shifting. In the 2015 Autumn Statement, Chancellor George Osborne announced that £800m would be spent on tackling tax avoidance in order to recover £5 billion a year by 2019–20. In addition, large companies will now have to publish their UK tax strategies and any large businesses that persistently engage in aggressive tax planning will be subject to special measures. With these policies, Osborne has claimed to be at the forefront of combating tax avoidance. However, he has been criticised over his perceived inaction on enacting policies set forth by the OECD to combat tax avoidance.

In April 2015, the Chancellor George Osborne announced a tax on diverted profits, quickly nicknamed the "Google Tax" by the press, designed to discourage large companies moving profits out of the UK to avoid tax. In 2016, Google agreed to pay back £130m of tax dating back to 2005 to HMRC, which said it was the "full tax due in law". However, this amount of tax has been criticised by Labour, with Labour leader Jeremy Corbyn saying that the rate of tax paid by Google only amounted to 3%. Former Liberal Democrat Business Secretary Vince Cable also said Google had "got off very, very lightly", and Osborne "made a fool of himself" by hailing the deal as a victory. Although claiming that it was "absurd" to lay blame onto Google for tax avoidance, saying that EU member states should "[compete] with each other to offer firms the lowest corporate tax rates", Conservative MP Boris Johnson said it was a "good thing" for corporations to pay more tax. However, Johnson said he did not want tax rates to go up or for European Union countries to do this in unison.

Tax evasion in the United States

From Wikipedia, the free encyclopedia

 

Under the federal law of the United States of America, tax evasion or tax fraud, is the purposeful illegal attempt of a taxpayer to evade assessment or payment of a tax imposed by Federal law. Conviction of tax evasion may result in fines and imprisonment. Compared to other countries, Americans are more likely to pay their taxes fairly, honestly, and on time.

Tax evasion is separate from tax avoidance, which is the legal utilization of the tax regime to one's own advantage in order to reduce the amount of tax that is payable by means that are within the law. For example, a person can legally avoid some taxes by refusing to earn more taxable income, or by buying fewer things subject to sales taxes. Tax evasion is illegal, while tax avoidance is legal.

In Gregory v. Helvering the US Supreme Court concurred with Judge Learned Hand's statement that: "Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes." However, the court also ruled there was a duty not to illegally distort the tax code so as to evade paying one's legally required tax burden.

Definition

The tax code, 26 United States Code section 7201, provides:

Sec. 7201. Attempt to evade or defeat tax

Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.

To prove a violation of the statute, the prosecutor must show (1) the existence of a tax deficiency (an unpaid federal tax), (2) an affirmative act constituting an evasion or attempted evasion of either the assessment or payment of that tax, and (3) willfulness (connoting the voluntary, intentional violation of a known legal duty).

A genuine, good faith belief that one is not violating the Federal tax law based on a misunderstanding caused by the complexity of the tax law is a defense to a charge of "willfulness", even though that belief is irrational or unreasonable. A belief that the Federal income tax is invalid or unconstitutional is not a misunderstanding caused by the complexity of the tax law, and is not a defense to a charge of "willfulness", even if that belief is genuine and is held in good faith.

Occurrence

Nearly all Americans believe that cheating on taxes is morally and ethically unacceptable. The voluntary compliance rate (a technical measurement of taxes being paid both on time and voluntarily) in the US is generally around 81 to 84%. This is one of the highest rates in the world. By contrast, Germany's voluntary compliance rate is 68%, and Italy's is 62%.

The Internal Revenue Service (IRS) has identified small business and sole proprietorship employees as the largest contributors to the tax gap between what Americans owe in federal taxes and what the federal government receives. Small business and sole proprietorship employees contribute to the tax gap because there are few ways for the government to know about skimming or non-reporting of income without mounting more significant investigations.

The willful failures to report tips, income from side-jobs, other cash receipts, and barter income items are examples of illegal cheating. Similarly, those persons who are self-employed (or who run small businesses) evade the assessment or payment of taxes if they intentionally fail to report income. One study suggested that the fact that sharing economy firms like Airbnb, Lyft, and Etsy do not file 1099-K forms when participants earn less than $20,000 and have fewer than 200 transactions, results in significant unreported income. A recent survey found that the amount of unreported income for 2016 in the United States numbered at US $214.6 billion, with one in four Americans not reporting the money made on side-jobs.

The typical tax evader in the United States is a male under the age of 50 in the highest tax bracket and with a complicated return, and the most common means of tax evasion is overstatement of charitable contributions, particularly church donations.

Foreign tax havens

Jurisdictions which allow for limiting taxation, known as tax havens, may be used for both legally avoiding taxes and illegally evading taxes. In 2010, the Foreign Account Tax Compliance Act was passed to better enforce taxation in foreign jurisdictions.

Illegal income

U.S. citizens are required to report unlawful gains as income when filing annual tax returns (see e.g., James v. United States) although such income is typically not reported. Suspected lawbreakers, most famously Al Capone, have been successfully prosecuted for tax evasion when there was insufficient evidence to try them for their non-tax related crimes. Reporting illegal income as earned legitimately may be illegal money laundering.

Estimates of lost government revenue

U.S. Federal Revenue Lost
to Tax Evasion

Year	Revenue lost (US$ billion)
2010	305
2009	304
2008	357
2007	376
2006	376
2005	314
2004	272
2003	257
2002	269
2001	290
Total revenue lost:	$3.44 trillion

In the United States, the IRS estimate of the 2001 tax gap was $345 billion. For 2006, the tax gap is estimated to be $450 billion.

A more recent study estimates the 2008 tax gap in the range of $450 to $500 billion, and unreported income to be approximately $2 trillion. Thus, 18 to 19 percent of total reportable income is not properly reported to the IRS.

Measurement

Beginning in 1963 and continuing every 3 years until 1988, the IRS analyzed 45,000 to 55,000 randomly selected households for a detailed audit as part of the Taxpayer Compliance Measurement Program (TCMP) in an attempt to measure unreported income and the "tax gap". The program was discontinued in part due to its intrusiveness, but its estimates continued to be used as assumptions. In 2001, a modified random-sampling initiative called the National Research Program was used to sample 46,000 individual taxpayers and the IRS released updated estimates of the tax gap in 2005 and 2006. However, critics point out numerous problems with the tax gap measure. The IRS direct audit measures of noncompliance are augmented by indirect measurement methods, most prominently currency ratio models.

After the TCMP audits, the IRS focused on two groups of taxpayers: those with just a small change in the balance due, and those with a large (over $400) change in the balance due. Taxpayers were further partitioned into "nonbusiness" and "business" groups and each group was divided into five classes based on total positive income. Using line items from the auditor's checksheet, discriminant analysis, and a scoring mechanism, each return was awarded a score, known as a "Z-score". Higher Z-scores were associated by IRS personnel with a higher risk of tax evasion. However, the Discriminant Index Function (DIF) system did not provide examiners with specific problematic variables or reasons for the high score and so each filing had to be manually examined by an auditor.

Investigatory procedures

The IRS may carry out investigations to determine the correctness of any tax return and collect necessary income tax, including requiring the taxpayer to provide specific information such as books, records, and papers. The IRS whistleblower award program was created to assist the IRS in obtaining necessary information. While these investigations can lead to criminal prosecution, the IRS itself has no power to prosecute crimes. The IRS can only impose monetary penalties and require payment of proper tax due. The IRS performs audits on suspicion of noncompliance but has also historically performed randomly selected audits to estimate total noncompliance; the former audits have much higher chance of noncompliance.

Net worth and cash expenditure methods of proof

Under the net worth and cash expenditure methods of proof, the IRS performs year-by-year-by-year comparisons of net worth and cash expenditures to identify under reporting of net worth. While the net worth method and the cash accrual method may be used separately, they are often used in conjunction with one another. Under the net worth method, the IRS chooses a year to determine the taxpayer's opening net worth at year's end. This provides a snapshot of the taxpayer's net worth at a particular point in time. 

The snapshot includes the taxpayer's cash on hand, bank accounts, brokerage (stocks and bonds), house, cars, beach house, jewelry, furs, and other similar items. Generally the IRS learns about these items through very thorough and in-depth investigations, sometimes casing the suspected fraudulent taxpayer. In addition, the IRS also assesses the taxpayer's liabilities. Liabilities include expenses such as the taxpayer's mortgage, car loans, credit card debts, student loans, and personal loans. The opening net worth is the most critical point at which the IRS must assess the taxpayer's assets and liabilities. Otherwise, the net worth comparison will be inaccurate.

The IRS then evaluates new debts and liabilities accumulated in the next year, and assesses the taxpayer's new net worth at the next year's end. In addition, the IRS reviews the taxpayer's cash expenditures throughout the tax year. The IRS then compares the increase in net worth and the cash expenditures with the reported taxable income over time in order to determine the legitimacy of the taxpayer's reported income. 

The net worth method was first used in the case of Capone v. United States. The cash method was approved in 1989 in United States v. Hogan.

Bank deposit cash expenditure method

First approved by the Eighth Circuit in 1935 in Gleckman v. United States, the bank deposit cash expenditure method identifies tax evasion through review of the taxpayer's bank deposits. This method of investigation primarily focuses on whether the taxpayer's total bank deposits throughout the year are equal to the taxpayer's reported income. This method is most appropriate when the majority of the taxpayer's income is deposited in the bank and most expenses are paid by check.

This method is most commonly used for surveillance of tipped employees and is combined with statistical analysis to determine what a tipped employees actual wages are. Information gathered through this method is most successful when the credibility of tipped employees can be destroyed. This method is used less frequently now for tipped employees because the IRS negotiates with hotels or casinos, the largest employers of tipped employees, to identify a tip estimate. If the tipped employee reports the minimal amount agreed upon, he is not questioned by the IRS. However, it is recommended for corroborating other methods of proof. Given the uncertainty of this method, this method likely could not be used in criminal prosecutions where the guilt must be found beyond a reasonable doubt.

Whistleblower program

In addition to the methods of proof the IRS has developed, the Tax Relief and Health Care Act of 2006 created the IRS Whistleblower Office, which allows anonymous whistle blowers to receive 15 to 30 percent of any recovery by the IRS which comes to at least $2 million including all penalties, interests and any other monies collected from the government. The whistle blower program seeks information based on evidence and analysis which can provide a solid basis for further investigation rather than speculation and hearsay.

The program is designed to provide incentive to ordinary citizens to inform on tax cheats. The program provides far greater incentives for whistle blowers than previous programs because under prior programs the government was not required to compensate whistleblowers. Under this program, a taxpayer may file a lawsuit in court if he or she does not receive a deserved award.

Historical U.S. tax evasion cases

The IRS publishes the number of civil and criminal penalties in the IRS Data Book (IRS Publication 55B) and makes these available online. Table 17 shows tabulated data on civil penalties and Table 18 shows data on criminal investigations. In 2012, the IRS assessed civil penalties in 37,910,493 cases and 4,994,926 abatements. In 2012, the IRS initiated 5,125 investigations; of 3,701 which were referred to prosecution, 2,634 resulted in conviction. The agency also highlights current investigations on its website by various categories, including abusive returns, tax schemes, corporate fraud, money laundering, and various other categories.

• 1932–1939: Al Capone served seven years of an 11-year sentence in federal prison on Alcatraz Island for tax evasion. He was let out of jail early while suffering with the advanced stages of syphilis.
• 1933: Gangster Dutch Schultz was indicted for tax evasion. Rather than face the charges, he went into hiding.
• U.S. President Harry Truman pardoned George Caldwell, George Berham Parr, and Seymour Weiss for income tax evasion.
• 1963: Joe Conforte, a brothel owner, served two and a half years in prison, convicted for the crime of income tax evasion.
• 1971: Martin B. McKneally (R-NY) was placed on one-year probation and fined $5,000 for failing to file income tax return. He had not paid taxes for many years prior.
• 1972: Cornelius Gallagher (D-NJ) pleaded guilty to tax evasion, and served two years in prison.
• 1974: Otto Kerner Jr. (D) - Resigned as a judge of the Federal Seventh Circuit Court District after conviction for bribery, mail fraud, and tax evasion while Governor of Illinois. He was sentenced to 3 years in prison and fined $50,000.
• 1982: Frederick W. Richmond (D-NY) was convicted of tax evasion and possession of marijuana. Served 9 months
• 1985: Joseph Alioto, a lawyer, confessed that he paid no income taxes during the years he served as Mayor of San Francisco.
• 1985–1986: Iran–Contra Affair - Thomas G. Clines was convicted of four counts of tax-related offenses for failing to report income from the operations.
• 1987: Robert Bernard Anderson (R) former United States Secretary of Treasury (1957–1961) pleaded guilty to tax evasion while operating an offshore bank.
• 1986: Harry Claiborne, Federal District court Judge from Nevada, was impeached by the House and convicted by the Senate on two counts of tax evasion. He served over a year in prison.
• 1991: Harry Mohney, founder of the Déjà Vu strip club chain, began to serve three years in prison for tax evasion.
• "Matty the Horse" Ianniello (Mafia) was sent to prison for income tax evasion.
• 1992: Catalina Vasquez Villalpando (R), Treasurer of the United States, pleads guilty to obstruction of justice and tax evasion.
• 1993: Sam Roti, nephew of Chicago alderman Fred Roti, was indicted on Federal tax charges, which were later dropped.
• Nicolas Castronuovo is the owner of the Florida pizza parlor where Senator Robert Torricelli was caught on an FBI wiretap soliciting contributions in 1996. Nicolas Castronuovo and his grandson Nicholas Melone later pleaded guilty to evading the government of $100,000 in taxes.
• 1995: Webster Hubbell, (D) Associate Attorney General, pleaded guilty to mail fraud and tax evasion. He is sentenced to 21 months in prison.
• 1996: Heidi Fleiss was convicted of federal charges of tax evasion and sentenced to 7 years in prison. After two months she was released to a halfway house, with 370 hours of community service.
• 2001: U.S. President Bill Clinton pardoned Marc Rich and Pincus Green, indicted by U.S. Attorney on charges of tax evasion and illegal trading with Iran. President Clinton also pardons Edward Downe, Jr., for wire fraud, filing false income tax returns, and securities fraud.
• 2002: James Traficant (D-OH) was convicted of ten felony counts including bribery, racketeering and tax evasion and sentenced to 8 years in prison.
• 2002: The Christian Patriot Association, an "ultra-right-wing group", was shut down after convictions for tax fraud and tax evasion.
• 2005: Duke Cunningham (R-CA) pleaded guilty to charges of conspiracy to commit bribery, mail fraud, wire fraud and tax evasion in what came to be called the Cunningham scandal. He is sentenced to over eight years.
• 2006: Jack Abramoff, lobbyist, was found guilty of conspiracy, tax evasion and corruption of public officials in three different courts in a wide-ranging investigation. Now serving 70 months and fined $24.7 million
• 2008: Charles Rangel (D-NY) failed to report $75,000 income from the rental of his villa in Punta Cana in the Dominican Republic and was forced to pay $11,000 in back taxes. The House of Representatives voted 333–79 to censure Rangel. It had been 27 years since the last such measure and Rangel was only the 23rd House member to be censured.
• 2008: Senator Ted Stevens (R-AK) was convicted on 7 counts of bribery and tax evasion just prior to the election. He continued his run for re-election, but lost. However, prior to sentencing, the indictment was dismissed—effectively vacating the conviction—when a Justice Department probe found evidence of gross prosecutorial misconduct.
• 2013: Big Four accounting firm Ernst & Young agreed to pay federal prosecutors $123 million to settle criminal tax avoidance charges stemming from $2 billion in unpaid taxes from about 200 wealthy individuals advised by four Ernst & Young senior partners between 1999 and 2004.