“It ought to be remembered that there is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things” – Niccoló Machiavelli, The Prince
Fraud Friday is coming to you from the long & winding road this week. Accompanying the lovely & talented spouse to a corporate awards event & enjoying a brief respite from the deep freeze of the Central Plains has been a much-needed change of pace.
However, there is no escaping the increasingly-chaotic situation brought about by the recent sweeping changes to the federal tax code. We’ll focus on the implications for increased tax fraud & the deterioration of enforcement capabilities on the part of the regulatory agencies (aka the IRS).
As most of you are surely aware, Congress passed H.R. 1, the Tax Cuts & Jobs Act in late December of last year. While this blog assiduously attempts to avoid discussing the overt political aspects of the legal & regulatory environment, a couple of key developments pertain specifically to those of us in the compliance and investigative universes:
1) Loopholes in loopholes inside loopholes that also contain loopholes
Look, I am FAR from being an expert on tax structuring/avoidance, but minds far greater than mine have pointed out how the new legislation contains enough vague, opaque language to provide decades of billable hours to the tax nerds:
Of particular concern is the potential for clever manipulation of individual earned income into lower tax rates by creating what are essentially one-person corporations. As explained by Vox:
‘Under the new law, the top ordinary rate on labor income will be much higher than the top rate on corporate income. As a result, many taxpayers will be able to shield a portion of their labor income from tax by setting up a corporation. So Joe Smith, previously an assistant account director for a PR firm, can become Joe Smith, Inc., a new startup company! The firm makes payments to the new corporation instead of to Smith. Thus, Smith shields his labor income from the higher individual tax rate.
The IRS might investigate whether the new corporation pays Smith a reasonable fee for his services, which some tax-law precedents suggest it is obliged to. That’s one check against this tax dodge, and there could be others. But how many new corporations can the IRS investigate? And if Smith can find a few friends to join his new corporation, it will be even harder for the IRS to challenge.” Which brings us to our second point:
2) The IRS is Hosed
It’s no secret that there has been an exodus of the IRS workforce over the past several years. And who can blame them? Years of significant budget cuts, failure to recruit new talent, and a seemingly infinite supply of political contempt for the entity that administers the collection of the vast majority of federal funds.
Predictably, the enforcement rate has plummeted, and academics and tax experts generally agree that the “rate of non-compliance” (i.e. tax cheating) is under-estimated, because it’s common sense that many people who cheat won’t volunteer that information on a survey, and enforcement actions against non-compliers by definition clearly don’t capture the full picture of tax cheating. As for that dreaded staple of American life, the audit, rates have never been lower. From CNBC:
‘The number of people audited by the IRS in 2016 dropped for the sixth straight year, to just over 1 million. The last time so few people were audited was 2004. Since then, the U.S. has added about 30 million people.
The IRS blames budget cuts as money for the agency shrunk from $12.2 billion in 2010 to $11.2 billion last year. Over that period, the agency has lost more than 17,000 employees, including nearly 7,000 enforcement agents. A little more than 80,000 people work at the IRS.
IRS Commissioner John Koskinen said budget cuts are costing the federal government between $4 billion and $8 billion a year in uncollected taxes.
‘We are the only agency if you give us more people and money, we give you more money back,’ Koskinen said in an interview.”
3) Which leads to Some Unsettling Possible Societal Outcomes
Besides the obvious fact that in order to function, the US gov’t requires revenue, there are additional sociological implications to a steady erosion in the willingness of the populace to pay what they owe. Income taxes are unlike many other forms of taxation in that they rely to a large degree on the voluntary compliance of taxpayers. As that obligation becomes less ingrained in the American psyche, questions arise about long-term societal stability and the underlying fundamental assumptions of our Republic: https://www.vice.com/en_us/article/d33daz/dont-look-now-but-americas-tax-system-may-collapse-soon
It will be certainly be interesting and scary to see how this plays out over the next several years.
Gotta go with a couple of classics on this one. Topically appropriate: “You know where you are? you’re in the jungle, baby! And you gonna die!”
Norman Love Confections. While in Southwest Florida this week, we visited this shop on the urgent recommendation of our Über driver, and we are quite glad we did. All manner of indescribably delicious confections that are also miniature works of art. The chocolate alligator looked absolutely real! A must-visit if you’re in the Ft. Myers/Na-les area, and they ship worldwide.
Until next time, keep up the good fight!