Second Special Voluntary Disclosure Initiative Opens

The IRS announced another round of special voluntary disclosure for people hiding income outside the US. The initiative is designed to bring offshore money back into country. Taxpayers with undisclosed income in offshore accounts have until August 31 to get current on their taxes. While they will have to pay penalties, I guarantee it is better to rat yourself out than to have the IRS find you…

IRS.gov reports:

A special voluntary disclosure initiative designed to bring offshore money back into the U.S. tax system and help people with undisclosed income from hidden offshore accounts get current with their taxes. The new voluntary disclosure initiative will be available through Aug. 31, 2011.

“As we continue to amass more information and pursue more people internationally, the risk to individuals hiding assets offshore is increasing,” said IRS Commissioner Doug Shulman. “This new effort gives those hiding money in foreign accounts a tough, fair way to resolve their tax problems once and for all. And it gives people a chance to come in before we find them.”

The IRS decision to open a second special disclosure initiative follows continuing interest from taxpayers with foreign accounts. The first special voluntary disclosure program closed with 15,000 voluntary disclosures on Oct. 15, 2009. Since that time, more than 3,000 taxpayers have come forward to the IRS with bank accounts from around the world. These taxpayers will also be eligible to take advantage of the special provisions of the new initiative.

“As I’ve said all along, the goal is to get people back into the U.S. tax system,” Shulman said. “Combating international tax evasion is a top priority for the IRS. We have additional cases and banks under review. The situation will just get worse in the months ahead for those hiding assets and income offshore. This new disclosure initiative is the last, best chance for people to get back into the system.”

The new initiative announced today – called the 2011 Offshore Voluntary Disclosure Initiative (OVDI) -- includes several changes from the 2009 Offshore Voluntary Disclosure Program (OVDP). The overall penalty structure for 2011 is higher, meaning that people who did not come in through the 2009 voluntary disclosure program will not be rewarded for waiting. However, the 2011 initiative does add new features.

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How Offshore Tax Evasion Affects You

There has been a lot of talk about offshore tax evasion in the news lately. Especially in regards to UBS and new offshore tax evasion enforcement efforts between the U.S. and Switzerland.

Unfortunately, many taxpayers do not pay much attention to these issues, as they do not think that offshore tax issues have anything to do with them personally. However, that is not the case. Offshore tax evasion actually affects nearly every American. And here is how:

National Tax Compliance

The IRS is having a hard time collecting tax debts during the economic crisis. According to recent studies, Federal tax revenue plunged $138 billion—or 34% from last year—which is the biggest drop in almost three decades. A large amount of the lost revenue can be attributed to offshore tax evasion. This leaves the rest of us law-abiding citizens to foot the bill.

While government officials are hoping to generate additional revenue from increased tax compliance, they know that it alone will not cover our expenses. Thus, they anticipate raising taxes on the wealthiest Americans. Plans to raise taxes has left thousands of Americans—rich and poor—disgruntled and willing to protest. In addition to the Tea Parties that were carried out in April, tax protestors are hoping to carry out additional events this July.

Economic Recovery Prevention

Despite lots of effort, the country’s economic recovery is taking some time. As the economy continues to stall, more and more taxpayers are looking for any way possible to reduce their tax liability. A whopping $250 billion of missing revenue from the past decade is said to be missing due to offshore bank accounts. This missing money is essentially preventing the country from making a faster recovery as it prevents the federal government from investing the money into other programs.

President Barack Obama has already taken great strides to recover some of this lost revenue by evoking legal action with popular offshore bank UBS. "Nobody likes to pay taxes, particularly in times of economic stress," Obama said. However a crackdown on "illegal overseas tax evasion" was necessary in order to provide "meaningful relief for hardworking families." He continued to explain that "the way to make American businesses competitive is not to let some individuals and businesses dodge their responsibilities and let ordinary Americans pick up the slack."

State Economies

Not only does offshore banking affect Federal tax revenue, in many instances it drastically affects local and State governments. According to a recent study observed in Montana's Clark Fork Chronicle, "non-residents who have Montana earned income fail to pay income taxes at an astonishing rate of 78%". This statistic seems staggering, but is actually not as uncommon as you would think. Some states do not have very strong tax enforcement agencies, which can quickly lead to millions of dollars in lost revenue. Montana and other States in similar situations cite offshore banking as a large contributor to the problem, claiming that they simply cannot keep track of all of their out-of-state taxpayers so easily, let alone investigate their offshore bank accounts.

Organized Crime Ties

While not all offshore bank accounts are being managed illegally, even the more humble ones can unknowingly foster criminal activity. It is a well-known fact that organized crime uses offshore bank accounts to disguise their criminal activity. Offshore banking protects the "underground economy". The most common of crimes is of course money laundering, which is made all the easier with offshore bank accounts that are highly protected and usually well disguised.

Obama's Tax Plans Raises High-Tech Hackles

From the Associated Press:

President Barack Obama's plan to impose U.S. taxes on corporate America's overseas profits threatens to open a big crater in the financial statements of technology companies.

While additional taxes are rarely popular, Obama's decision to go after corporate earnings outside the United States is a particularly prickly subject for technology executives because the industry has been steadily boosting its overseas sales amid rising demand for its gadgetry and services.

If Obama's proposal becomes law, the hard-hit companies would include tech bellwethers like Hewlett-Packard Co., IBM Corp., Cisco Systems Inc., Microsoft Corp. and Google Inc. Each of those companies realized a benefit of more than $1 billion from lower foreign tax rates in their most recent fiscal years — an advantage that could lost if Obama is able to change the rules.

"It would be like an earthquake for high tech," said Carl Guardino, chief executive of Silicon Valley Leadership Group, an industry trade association. "On a Richter scale of 1 to 10, this would be a 12."

Collectively, HP, IBM, Cisco, Microsoft and Google lowered their tax bills by a combined $7.4 billion in their last fiscal years by taking advantage of lower tax rates outside the United States, according to an analysis by The Associated Press.

Through the years, these five tax companies have avoided U.S. income taxes and foreign withholding taxes on a combined $72 billion in undistributed earnings from their foreign operations.

While Obama's proposal might not tax all the money U.S. companies keep overseas, it apparently would target a big chunk. Obama estimated his plan would raise a total of $210 billion, or an average of about $21 billion annually, over a 10-year period.

By reinvesting their earnings overseas, U.S. companies insulate themselves from much higher tax rates had the money been made in their home country.

Google, for instance, would have been hit with an effective tax rate of 45.2 percent instead of 27.8 percent last year if it hadn't been able to capitalize on lower rates overseas, according to the Mountain View-based company's annual report. Without the lower foreign rates, Google's 2008 tax bill would have been $1.02 billion higher. Google's income before taxes totaled $5.85 billion last year.

Obama has been strongly supported so far by Google CEO Eric Schmidt, who campaigned for the president last year and has subsequently served as a technology adviser.

Google spokesman Adam Kovacevich said Monday it was too early to evaluate how Obama's tax proposal might affect the Internet search leader's operations because the idea is likely to be revised as it wends its way through Congress.

HP reaped a $1.77 billion benefit in its fiscal 2008 from lower foreign tax rates while Cisco and Microsoft each saw benefits of more than $1.6 billion, according to the companies' annual reports. IBM's foreign tax advantage last year totaled about $1.3 billion.

The high-tech industry isn't the only beneficiary from the current tax rules. General Electric Co., for instance, lowered its effective tax rate by nearly 27 percent last year by keeping profits outside the United States. That saved the company more than $5 billion in potential U.S. taxes.

And offshore earnings enabled drug maker Johnson & Johnson to lower its effective tax rate by 12.4 percentage points last year, saving about $2 billion.

Obama reasons that U.S. companies will create more jobs in the United States if there is less of an advantage to setting up operations overseas.

But Guardino disagrees, maintaining that high-tech firms and other U.S. companies are establishing more foreign offices to take advantage of their biggest growth opportunities. And as they bring in more revenue overseas, companies are also able to hire more workers in the United States as well as in other countries, Guardino said.

As it is, Google already generates more than half its revenue outside the United States and that percentage is expected to increase as more people around the world go online and gravitate to the company's services.

If they face higher taxes on their foreign earnings, high-tech companies will be at a competitive disadvantage that will discourage them from expanding their payrolls, Guardino said.

By coincidence, Guardino and about 50 Silicon Valley executives had already scheduled a trip to Washington this week. Guardino said the group plans to focus on meeting with lawmakers to explain why Obama's idea to tax overseas profits would do more harm than good.

Coca-Cola, Oracle, Intel Use Cayman Islands to Avoid U.S. Taxes

Coca-Cola, Tyco International, and Seagate Technology (the worlds largest producer of hard drives) are among the companies accused of avoiding taxes by having offshore locations. If passed into law, President Obama’s recent tax plans would likely force all of these corporations to pay higher taxes. Check out a snippet of the article below or read the full story at Bloomberg.com explaining why so many US companies would be affected.

Seagate Technology, the world’s largest maker of hard disk drives, is headquartered in Scotts Valley, California. Yet the documents it files with the Securities and Exchange Commission list its address on South Church Street in George Town, the capital of the Cayman Islands.

Seagate is just one of the companies that may be affected by President Barack Obama’s proposal yesterday to raise about $190 billion over the next decade by outlawing techniques used by U.S. companies in offshore locations to avoid paying taxes. While the U.S. corporate tax rate is 35 percent, Seagate paid an effective tax rate of 5 percent in the year ended June 2008, according to data compiled by Bloomberg.

The Caymans have no corporate income tax for companies incorporated there. The Caribbean island has helped scores of U.S. companies, including Coca-Cola Co. and Oracle Corp., to legally avoid billions in tax payments to the U.S. government, says U.S. Senator Byron Dorgan.

“Our Main Street businesses are working hard during this economic downturn to pay their fair share of taxes,” says Dorgan, 66, a North Dakota Democrat. “Some of the country’s largest corporations are using these loopholes to avoid paying their fair share of taxes. It is my hope that the Congress will quickly take action to pull the plug on tax breaks that subsidize runaway plants that move U.S. jobs overseas.”

One quarter of the 100 largest contractors with the U.S. federal government, including Altria Group Inc. and Tyco International Ltd have had subsidiaries in the Caymans, according to a study by the Government Accountability Office. At least 10 of the 30 companies listed in the Dow Jones Industrial Average have had units with addresses in the Caymans.

As of November 2007, 378 U.S. publicly traded companies had at least one significant subsidiary in the Cayman Islands, a GAO study found. Altria, Tyco, Coke and Oracle still have subsidiaries in the Caymans, according to their most recent SEC filings. Seagate lists its headquarters in Grand Cayman.

One of the Dow 30 companies using offshore sites to reduce its U.S. taxes is Santa Clara, California-based Intel Corp., the world’s largest chipmaker.

Intel’s then vice president of tax, licensing and customs, Robert Perlman told the U.S. Senate Finance Committee in March 1999 that Intel would have been better off incorporating in the Cayman Islands when it was founded in 1968.

“Our tax code competitively disadvantages multinationals simply because the parent is a U.S. corporation,” Perlman testified.

President Obama Takes Aim At Offshore Tax Dodges

From the LA Times.com:

President Obama said this morning that he plans to crack down on American companies that legally avoid U.S. tax obligations by investing money in countries with lower tax rates.

He also plans to eliminate tax deductions for companies that achieve similar breaks by sending jobs overseas, while extending the deduction for those who create domestic jobs.

The practice of "offshoring" cheats other taxpayers, the president said, and those who circumvent the system are "aided and abetted by a broken tax system" that he pledged to fix.

Speaking to reporters in the Grand Foyer of the White House, Obama said he doesn't think companies should be rewarded more for creating a job in Bangalore, India, than for creating one in Buffalo, N.Y.

"I want to see our companies remain the most competitive," the president said, while not rewarding them for moving jobs overseas.

The president's plans could yield an additional $210 billion in tax revenue over the next decade, according to the administration.

Obama's plans would:

Eliminate some tax deductions for companies that earn profits in countries with low tax rates.

Make permanent a research and experimentation tax credit, which is offered for creating domestic jobs.

End a loophole that allows corporations to avoid taxes by reporting to the U.S. government that they're paying taxes in foreign countries and then telling the foreign countries that they're paying here.

He also is asking for money to hire 800 Internal Revenue Service agents charged with improving enforcement.

The president today called on Congress to pass "common sense" measures, including one that would require overseas banks to provide information about how much U.S. corporations invest. If they won't cooperate, Obama said, the law should assume that those banks are sheltering money for investors.

During the presidential campaign, Obama spoke frequently about ending offshoring practices, often joking about a building in the Cayman Islands that supposedly houses thousands of corporations. As a candidate, Obama promised to scale back tax breaks for U.S. companies that send jobs overseas and give them instead to those who create jobs in the U.S.