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Picture 1(2)The Foreign Account Tax Compliance Act, or FATCA, is frequently referenced in the news as the cause of global bank transparency. In reality, though, bank secrecy was really broken by the John Doe summons. In 2008, the John Doe summons blew the lid off the hushed world of Swiss banking. A judge allowed the IRS to issue a John Doe summons to UBS for information about U.S. taxpayers using Swiss accounts. Continue Reading…

In an undeniably bad year for Facebook’s PR, recently revealed figures show that the company used tax avoidance strategies to pay less than 0.1% in taxes on foreign profit—$4.5 million on over $1.3 billion.

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What is Mitt Hiding?

July 18, 2012 — 1 Comment

More than 40 years ago, George Romney, instituted the practice of releasing tax returns in his bid for the Republic Party nominations. Since then, we have not seen any tax scandals involving nominees or presidents except for Richard Nixon’s abuse of the tax code. Ironically, Mitt Romney (George’s son) is refusing to release his tax returns beyond 2010. When running for President, transparency is a vital characteristic in a respectable candidate. However, Mitt Romney is adamantly against showing his returns beyond 2010. What is he hiding?

Mitt Romney’s extensive business experience has become more of a liability than an asset. Obama’s campaign has been disclosing some controversial practices done by Bain Capital (Romney’s old company) such as using offshore accounts in the Cayman Islands.  This may sound like an attack ad against Romney (which it is), however, Republican colleagues have been urging Romney to release his returns as well.

“The costs of not releasing the returns are clear, therefore he must have calculated that there are higher costs in releasing them” said George Will, long-time conservative commentator and Washington Post Columnist.

Romney’s wealth is no secret, however, that does not justify his reluctance to release prior year returns. His 2010 tax return raised some red flags when it revealed his Swiss Bank Account and immense IRA. The Swiss Bank Account for a Presidential candidate is contentious because Romney is essentially speculating the U.S. dollar will lose value in time. The account was closed in early 2010, however, a question to ask is whether the account was reported in his taxes?

His IRA is an astounding $100 million which is odd because his annual contributions were restricted at Bain to $30,000. According to Edward Kleinbard of CNN, an explanation for his high IRA “is that Romney stuffed far more into his retirement plans each year than the maximum allowed by law by claiming that the stock of the Bain company deals that the retirement plan acquired had only a nominal value. He presumably would have done so by relying on a special IRS “safe harbor” rule relating to the taxation of a service partner’s receipt of such interests, but that rule emphatically does not apply to an interest when sold to a retirement plan, which is supposed to be measured by its true fair market value.”

Perhaps the most identifiable characteristic of his previous returns is his remarkably low tax rates. In 2010 the Romneys paid a 13.9% federal tax rate on their AGI of $22 million. This gave them a lower federal tax burden than an American family earning $40,000 to $50,000 annually. He is getting such a low rate because much of his income is in carried interest which is compensation for managing other people’s money.

Mitt Romney not showing his previous income tax returns says a lot more than if he just showed them in the first place. To be in the highest position in the country, a candidate should show full transparency and compliance with the people who would elect him. Until he changes his mind, we will only see speculation into what his tax returns are hiding.

JDKatz, P.C. is a full-service law firm focused on tax law and estate planning. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys.

Obama Campaign Ads:

When we hear the words, “tax haven,” we generally think of offshore locations such as the Cayman Islands or Isle of Man. However, we often overlook tax havens when they are right in front of our eyes. Not only is Delaware the first state, but it is also the first offshore haven right on America’s shores.

1209 North Orange Street seems innocuous in its name, however it is the legal address of 285,000 businesses. Among them are American Airlines, Walmart, Coca-Cola, Ford, General Electric, etc. These are global companies with substantial employee bases and ubiquitous recognition. 1209 North Orange is merely a dropbox location for these businesses. Beyond these giant corporations are small start-up businesses, mom and pop shops, scoundrels, and swindlers and they all showed up to minimize taxes, dance around regulations, and perhaps cover their tracks.

A classic tax avoidance operation is through a “shell company” whereby the process of buying and selling is mitigated through an “alleged” company to disguise the actual company’s profits. It takes less than an hour to incorporate a company in Delaware and the government is so eager about business coming in, the office of its secretary of state stays open until midnight Monday-Thursday.

“Shells are the No. 1 vehicle for laundering illicit money and criminal proceeds,” said Lanny A. Breuer, assistant attorney general for the criminal division of the Justice Department. “It’s an enormous criminal justice problem. It’s ridiculously easy for a criminal to set up a shell corporation and use the banking system, and we have to stop it.”

However, most of the businesses in Delaware are legitimate incorporations that use legal means to reduce their tax bills. Since 1792 when Delaware was ratified as the first state, many companies were lured to open business here because of its friendly corporate and tax laws.

To put in perspective how much Delaware has become a tax haven – nearly half of all public corporations in the U.S. are incorporated in Delaware. 133,297 businesses were set up in this state last year and there are currently more corporations than people living in the state (945,326 to 897,934)! Delaware has received roughly $860 million in taxes from these corporations, which accounts for a quarter of the state’s budget.

Delaware is also utilized as a tax bill reducer. The state allows companies to shift their revenue and royalties to their “holding company” where they are not taxed. This loophole has enabled corporations to reduce their tax payments by an estimated $9.5 billion. Obviously, tax officials are seeing through these evasion schemes, however there is little that can be done because most of the practices are completely legal.

What differs Delaware from the typical offshore havens like the Caymans, Isle of Man, and Jersey is its lack of transparency and secrecy. Most offshore havens require full disclosure of the company’s business, assets, debts, etc. before opening any type of account. In Delaware, you can essentially operate a business abroad and have just a mailing address in the state and receive all the tax benefits as if you lived there.

Delaware may be basking in tax income, however states like Pennsylvania are receiving the brunt end of the opportunity. Pennsylvania is claiming they are being robbed of their tax dollars. A major company involved in natural gas and drilling is said to have more than 400 subsidiaries all registered in Delaware, even though they do business in Pennsylvania. According to the Pennsylvania Budget and Policy Center, in 2004 the Delaware loophole cost Pennsylvania nearly $400 million in lost revenue in 2011.

Delaware officials are adamant about keeping the situation the same. It is hard to work around a legitimate tax haven, however if more cases of illegal practices arise, there may be more leverage to alter the state’s tax structure. For now, 1209 North Orange Street will remain America’s biggest tax haven.

JDKatz, P.C. is a full-service law firm focused on tax law and estate planning. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys.