Big tax break for corporations failed to create promised jobs

President Bush and Congress gave companies a big tax break two years ago, allowing them to repatriate billions of dollars in foreign profits and pay only minimal taxes with the justification that companies then would create more jobs in the U.S.

But the companies didn't create many jobs, reports the New York Times in a front-page article July 24. Instead, drug companies, which were the biggest beneficiaries of the program, have laid off tens of thousands of workers. And they "are once again using complex strategies, many of them demonstrably legal, to shelter billions of dollars in profits in international tax havens, according to their financial statements and independent tax experts," says the Times.

"With a few narrow exceptions, the drug companies are supposed to be paying as much as 35 percent of their worldwide profits in United States federal taxes," says the Times. "In reality they pay much less."

Transfer pricing is one way they can lower their U.S. tax bill, and it is one of the biggest challenges for tax enforcement. "Outsiders have a difficult time determining if companies have properly assessed the value of patents, trademarks and other intangible properties" for transfer pricing, says the Times.

IRS investigates derivatives to determine whether designed solely to avoid taxes

The Internal Revenue Service has requested data from Citigroup Inc. and Lehman Brothers Holdings Inc. to determine whether complex derivatives trades they put together for hedge-fund and other clients were set up primarily to avoid taxes, the Wall Street Journal reported today.

Citigroup and Lehman Brothers have received "information document requests" (IDRs) from the IRS relating to the use of derivatives to avoid withholding taxes on U.S. stock dividends, according to the Journal.

The story noted that the IRS inquiry comes as the agency conducts "a broader inquiry into a practice that is common among some securities firms, which for years have pitched clients on these transactions using names such as 'yield enhancement,' 'dividend arbitrage' and 'tax efficiency' trades."

Congress also is looking at tax advantages taken by wealthy entities, such as private-equity firms -- and the individuals who profit from them to determine whether changes in tax laws are needed to close loopholes that allow them to pay less taxes than they should.

National Taxpayer Advocate makes recommendations to Congress

Congress should require the IRS to adopt a long-term research strategy to figure out how taxpayers can be convinced to comply voluntarily with tax regulations as part of its efforts to close the "tax gap," the National Taxpayer Advocate's office recommended in a report delivered to Congress today.

"Even as Congress directs the IRS to address specific areas of noncompliance, Congress should require the IRS to adopt a long-term research strategy that focuses not only on 'closing the tax gap' but also on understanding what it takes to encourage taxpayers to be voluntarily compliant and how to change taxpayer behavior," wrote Taxpayer Advocate Nina Olson in the report.

The report, which is required annually by law, sets out three main objectives for the advocate's office: improve taxpayer services; ensure taxpayers' rights are protected in the IRS's debt collection initiative; and make the IRS's "offer in compromise" program accessible for taxpayers unable to pay their full tax bill. Many taxpayers have been unable to use the program because they are unable to make the required 20 percent down payment, according to the advocate's report.

The National Taxpayer Advocate's Report to Congress - Fiscal Year 2008 Objectives also provides statistical information and analysis of taxpayer issues.

Judge drops charges against 13 in KPMG tax-shelter case

A federal district court judge today dropped all charges against 13 former KPMG executives in the largest criminal tax-shelter fraud case ever.

Judge Lewis A. Kaplan wrote that he had to dismiss the charges because prosecutors had violated the defendants' constitutional rights when they pressured the accounting firm KPMG to quit paying their legal fees.

He said the charges against three other KPMG defendants would stand because they hadn't shown that KPMG would have paid their defense costs if the government hadn't interfered in the matter.

In 2005, the government accused 17 former KPMG executives and two others of selling illegal tax shelters, depriving the U.S. Treasury of at least $2 billion in revenue. One executive pleaded guilty and is cooperating with the government.

Charges against KPMG were dismissed in January after it paid a $456 million fine.

For more information, see the New York Times story.