How much global offshore tax evasion exists? It’s a difficult number to pin down.

One thing some parties can agree on — from academics to civil society — is that the OECD’s exchange of information frameworks, especially its automatic exchange of information (AEOI) standard, has reduced banking secrecy over the past several years. Recently, the EU Tax Observatory calculated that offshore tax evasion has decreased by a factor of nearly three in less than a decade because of AEOI. Now, only a quarter of offshore household wealth evades taxation, the report says.

The IMF reached a similar conclusion a few years ago; it said there’s “strong evidence” that deposits in offshore jurisdictions drop by an average of 25% after an AEOI agreement enters into force.

There are caveats — reduced deposits in one jurisdiction could create an increase in another. And not all offshore deposits are made to evade taxes.

The takeaway — according to the EU Tax Observatory — is that governments can quickly and substantially reduce tax evasion if they have the political will to do so.

The OECD Global Forum on Transparency and Exchange of Information for Tax Purposes has been saying this for years, particularly in the context of developing countries. The OECD doesn’t shy away from the fact that the earliest AEOI adopters from developing countries did so because it asked them to.

Many of those countries were either financial centers or jurisdictions that the OECD felt posed a threat to financial transparency. And the OECD was worried about their effect on the global system. These days, there’s less of that going on because some governments are approaching the OECD and asking — without any prompting — for assistance in implementing AEOI.

These conversations are occurring within an increasingly fraught period of tax multilateralism. Now that U.N. countries, in committee, have voted to move forward with a framework convention on international tax, there are questions about what this could mean for existing international tax projects at the OECD.

African countries led the U.N. effort, and their campaign reflects the deep triage situation that they, and other developing countries, find themselves in. For example, their governments must broaden their tax bases. They should terminate or renegotiate outdated treaties that do not serve them.

But the ongoing debate over international tax policymaking should not distract from the work that the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes is conducting.

Why? The OECD Global Forum’s new 2023 annual report shows how patience, and playing the long game, is beginning to pay dividends. And transparency standards are important from both a corporate and individual income tax lens; the latter is particularly important for developing countries with low individual income tax collections and low tax-to-GDP ratios.

Transparency standards are important for governments considering wealth taxes, like the ones that have appeared within some Latin American countries. They are important for the rank-and-file work of assembling voluntary disclosure programs. Temporary VDPs, that is. The OECD does not think it’s a good idea for taxpayers to get comfortable with the idea of flouting their tax obligations because they anticipate that a VDP might be on the horizon to save them.

They are also important for the technical, bureaucratic work of linking tax and anti-money-laundering regimes to improve tax compliance and boost domestic revenue mobilization. Some IMF experts are appealing to governments on this front, and this strategy best works in tandem with strong transparency frameworks.

It’s not the alluring, headline-grabbing digital tax work. It’s not chasing after Meta and Google with a tax stick. But there is room to tie the Global Forum’s work into discussions about international tax policymaking.

In an unprecedented move, the OECD released a report on international tax and Africa this fall. Most of that report discusses the inclusive framework, with the Global Forum getting a few short paragraphs. This was a missed opportunity to highlight the African experience with exchange of information, the challenges African countries are facing, and ways in which the OECD Global Forum can work to improve the experience for its African members.

The OECD already does this in its Tax Transparency in Africa reports, but it would have been helpful to link that work to the broader conversation about African experiences in international tax policymaking.

It would have been particularly interesting to discuss AEOI within that context. The reality is that AEOI is complex, and several developing countries — including African ones — are trying to develop the capacity to implement the standard. Year after year, the Global Forum’s reports detail how developing countries are grappling with these capacity constraints. That needs to change.

That said, if AEOI wasn’t working or potentially valuable, India wouldn’t have singled out AEOI as a priority issue for developing countries, as it did during its recent G-20 presidency. Nor would it have suggested — as it did this spring — that the OECD expand AEOI to real estate and other nonfinancial assets.

2023 in Review

Below are a few noteworthy items from the Global Forum’s 2023 annual report.

AEOI

First, the quality of information that countries are exchanging automatically has improved. The OECD reached this conclusion because it found that jurisdictions are having an easier time matching exchanged information with their domestic taxpayer databases. In 2022 the matching average hovered around 80%, compared to 68% in 2019.

What factors are enabling countries to improve the quality of their exchanges? Zayda Manatta, head of the Global Forum Secretariat, told Tax Notes that peer review input has been fundamental in helping authorities learn what data is most useful for their international peers.

“I think they learned from the process — and countries have been acting upon the feedback they received,” she said.

“Some countries made a huge effort to convey these messages to their financial institutions to guide them, they provided hotlines for the financial institutions, and they checked the information they received before sharing with their peers,” Manatta said.

Countries also made more use of AEOI data in 2023. Historically, countries have largely used AEOI data for activities like tax audits, risk assessments, taxpayer notifications, and tax collections. All of this remained the same in 2023, but it appears they are using the same data for more functions.

The most popular way to use AEOI data is in tax audits; 88% of AEOI countries used it for this purpose in 2023, which is a 10 percentage point increase compared with 2022. Risk assessments are also popular; 80% of AEOI countries used the data for this reason, which is a 5 percentage point increase compared to 2022.

Taxpayer notification landed in a distant third place, as 48% of AEOI countries used the data for this purpose, a 7 percentage point increase over 2022. A minority of AEOI countries are using the information for tax collections — only 34% said they did so in 2023. However, this fast-growing use increased 14 percentage points compared with 2022.

When asked if the improved quality of information played a factor in these increases, Manatta said it may have to a small extent. However, she believes it stems from countries’ growing confidence in using AEOI information.

“They are learning the process, they feel more confident in using the information, and we have conducted several meetings to share good practices on using the CRS data,” Manatta said.

Beneficial Ownership

Some Global Forum members, particularly developing ones, have long faced challenges in ensuring the availability of beneficial ownership information on relevant entities and arrangements and bank accounts.

In response, the OECD has been using this metric to evaluate countries in its second round of peer reviews on the exchange of information on request standard. And it is evaluating them closely.

According to the report, one third of the nearly 750 recommendations the OECD has issued in the second round involve the availability of beneficial ownership information. It found that nearly 50% of the jurisdictions reviewed lack a satisfactory level of availability.

That said, countries are largely taking this feedback seriously: This year’s report reveals that countries are tightening their beneficial ownership requirements as part of their annual follow-up review.

Several are achieving this by creating beneficial ownership registries, Manatta said. “This was not a requirement before, but in our annual reviews we have seen that this is a very successful approach,” she said. She also noted that some countries improved their supervision of registries.

“It’s not enough to just establish a register, if you don’t have someone to oversee the practice and ensure that updates are made,” Manatta said. “As concerns finance institutions, some countries didn’t have rules or requirements that the information be updated in a specific frequency. There was guidance for risk entities but there was no specific guidance for non-risk entities.”

“We still have a long way to go to get fully compliant,” she said. However, she expects that recent beneficial ownership transparency updates issued by the Financial Action Task Force (FATF) could help countries meet this requirement.

In March 2022, the FATF revised and strengthened its beneficial ownership standards for legal persons under recommendation 24. There, it urged countries to rely on public authorities to maintain beneficial ownership registers and suggested that countries explore the use of public registers.

And in February, the FATF agreed to update recommendation 25, which addresses legal arrangements, and broadly brings its requirements in line with recommendation 24.

India Asks for a Status Check

India, during its G-20 presidency, asked the OECD Global Forum for a status check on how developing countries are faring with the AEOI framework. Notably, India didn’t ask for a status check on pillars 1 and 2 but did for AEOI.

That should raise some attention about how important the Indian presidency found this work for developing countries.

Here are some top lines from the report, released in July.

Developing countries are gradually adopting AEOI — they represent just under a third of implementing jurisdictions. However, they account for nearly 40% of the roughly €95 billion in additional revenue like tax, interest, and penalties that all AEOI countries identified between 2014 and 2022.

Developing countries are also receiving far more information than they are sending. The reciprocity of exchanges has long been a concern, but in 2022 developing countries received information on more than double the number of accounts than they shared information.

In 2022 they received more than 33 million financial accounts. In comparison, they sent information on more than 16 million financial accounts.

It appears developing countries are experiencing some fairly quick progress once they overcome the technical and capacity hurdles of implementing AEOI. That said, progress is not uniform. Although AEOI is particularly helpful in the context of VDPs, which aren’t as robust in developing countries, and their share of global VDP revenue is less than 15%.

All told, over 52% of the Global Forum’s developing country members have committed to start AEOI by a specific date. And the OECD says countries that make that commitment are largely following through. If they are delayed, it’s mostly by a year or two.

That said, it’s important to acknowledge the historical context for some countries’ participation in AEOI. Up until 2019, the overwhelming majority — nearly three quarters — of developing countries that committed to AEOI had one of the following characteristics: They were G-20 countries, they hosted a financial center, or the OECD had identified them as a jurisdiction of relevance. In all three cases, they were asked to commit to AEOI. Their success may stem from the fact that the stakes of their compliance were higher than usual.

On the other hand, most developing countries that have committed to AEOI past that date — some 80% — did so voluntarily, the OECD says. An increasing number of these countries are so-called low-resource jurisdictions that need enhanced technical support from the Global Forum. Given their capacity constraints, it remains to be seen how their experiences might affect future Global Forum statistics.

What are some paths forward for developing countries? Now that some are receiving significant amounts of data, they must use it effectively. But this is a challenge for all Global Forum members — developed and developing — and the OECD noted that it could enhance its technical support in that area.

The OECD has already started helping some countries design their AEOI portals, but additional bespoke assistance would pose some challenges given the secretariat’s full roster. Manatta said that her secretariat responded to every request for assistance that it received in 2023.

Meanwhile, it remains to be seen how the G-20 might continue to advance this work. The report requested by the Indian G-20 presidency was the first of its kind, and the question is whether the new Brazilian G-20 presidency might take a similar interest in AEOI.

Manatta said she expects the Brazilian presidency to be very much interested with ensuring developing countries are engaged in tax transparency, because they have been very vocal about it.

Looking at the CARF

In October 48 jurisdictions pledged to implement the OECD’s Crypto-Asset Reporting Framework (CARF) by 2027, but these early adopters are largely developed countries.

As for enabling developing countries to participate, Manatta said the Global Forum will follow a similar approach to the one it used when initially implementing AEOI and the common reporting standard: “Those countries that do not present a risk for the level playing field would not necessarily be asked to commit to it, but they will be encouraged to implement it if they want to do so, and we will support them.”

In the meantime, the Global Forum is preparing guidance for all members. And Manatta stressed that countries should join the framework as they feel ready. “They don’t need to step in now; it’s not a closed group so at any point they want to join, they can join,” she said.

“But in principle, those countries who have implemented or are thinking of implementing the CRS would more easily come to CARF because of the information technology requirements. It would go hand in hand,” she said.

The post The Overshadowed OECD Tax Project appeared first on Financial Level.

All eyes will be on the Supreme Court on Tuesday, Dec. 5, 2023, as oral arguments are presented in Moore v. United States. The case centers on a 2017 Tax Cuts and Jobs Act provision that requires companies to pay tax on previously untaxed foreign profits.

Facts

The petitioners, Charles and Kathleen Moore, own a 13% stake in an Indian corporation, KisanKraft Machine Tools Private Limited.

In 2018, the Moores learned that they were subject to a mandatory repatriation tax, or MRT, under the 2017 tax reform law (sometimes referred to as the Tax Cuts and Jobs Act, or TCJA). They had never paid tax on their earnings because previous tax law allowed income earned abroad to remain deferred until it was repatriated—they had never claimed their earnings. Under the new law, the Moores were subject to tax going back to their original investment at a 15.5% tax rate—netting them a tax bill of $14,729.

The Moores paid the tax and sued for a refund, claiming the tax is unconstitutional.

(You can read more about the facts of the case and the MRT in my previous article here.)

Question in Moore

Several articles have been written about what the Supreme Court will address in Moore. As noted on the docket, the question presented is simply: Whether the Sixteenth Amendment authorizes Congress to tax unrealized sums without apportionment among the states.

Moores’ Arguments

The Moores argue that the MRT violates the Constitution’s apportionment requirements because it taxes them on ownership of personal property—their KisanKraft shares—and not on income they had realized or received.

They further argue that the Sixteenth Amendment refers to the ordinary meaning of income that typically requires realizing a gain. The lower court’s decision, they claim, is at odds with historical decisions that have found the Sixteenth Amendment’s exemption from apportionment to be limited to taxes on realized gains.

And importantly for tax policy, they allude to a suggested wealth tax being touted by the White House and some in Congress as another example of an unconstitutional tax on unrealized gains.

Others Weigh In

These arguments feel like bigger questions than simply whether the MRT is constitutional, which may explain why everyone from taxpayers to tax professors to tax pundits have weighed in—dozens of amicus briefs have been submitted in favor of and opposed to the arguments made in Moore.

When cases like this attract additional attention, those with interest or expertise in the subject, but aren’t a party to the litigation, may also file briefs to explain their point of view. It generally happens where matters of public interest are at stake. These briefs are called amicus briefs or, since we lawyers love Latin so much, amicus curiae. It means, literally, “friend of the court.”

Those who have submitted an amicus brief include George A. Callas, who helped develop section 965 (central to the case) as Senior Tax Counsel for former Speaker of the House of Representatives Paul Ryan, and Mindy Herzfeld, a professor of tax practice at the University of Florida Levin College of Law. Counsel of Record in the case is Amit Agarwal, co-chair of Holland & Knight’s appellate litigation team and a partner in the firm’s Tallahassee and Washington, D.C., offices.

Callas filed his amicus brief in October of 2023, noting that many in the tax world “felt caught off-guard” when the Supreme Court granted cert earlier in the year.

(If the Supreme Court decides to hear the matter, it’s called a grant of certiorari—by practice, at least four justices must vote to hear the case to be granted cert. Usually, cert is granted in a case of considerable importance, or one involving a circuit split. A circuit split happens when the appellate courts disagree on a matter of federal law, reaching different conclusions about its application—that did not happen here.)

Callas worked directly on the TCJA and was a congressional Republican staffer for nearly 15 years. Notably, from April 2009 until the end of 2015, he served as senior tax staff on the House Committee on Ways and Means under three Republican chairmen, including Chairman David L. Camp (R-MI) and Paul D. Ryan (R-WI). He says that section 965 is “compliant with the Sixteenth Amendment and not analogous to a wealth tax.”

Despite efforts by some to hijack the case as left-versus-right, Callas firmly believes that the issue is not partisan. And, he says, efforts to characterize the tax as a tax on unrealized gains on property are flawed—the tax was designed to capture previously untaxed foreign profits.

Background

The TCJA marked a dramatic change in how foreign profits were taxed. For years, the U.S. had struggled with how to treat companies that earned profits overseas. Generally, our global tax system imposes tax on all income earned by U.S. taxpayers no matter where earned. However, in some circumstances, companies could avoid U.S. tax by holding foreign profits overseas indefinitely. The TCJA made significant changes to encourage companies to repatriate earnings. And to ensure that foreign profits that had not yet been taxed didn’t completely escape tax, the new law imposed a tax on existing foreign profits that had not yet been repatriated.

The Moores claim that the tax is unconstitutional, essentially arguing that income should never be taxed unless it’s actually in hand. According to Callas, if that argument were found to be valid, it would upend large swaths of the tax code. Pass-through entities like partnerships, for example, do not pay tax—they pass the tax characteristics to the owners. Owners report their share of income on a Schedule K-1, even if they don’t have the payment in hand. To do otherwise would mean that the income would escape taxation altogether, which Callas suggests would be an absurd result.

As Callas noted in his brief, Ryan has estimated that as much as a third of the tax code could be deemed unconstitutional if the petitioners prevail. The consequences, Callas says, are enormous.

What To Watch For

The framing of the issue at oral arguments could influence how the Supreme Court rules. Callas notes that it’s essential that the justices understand that the tax is focused on income, not property. That distinction is not only meaningful for the Moores’ immediate case, but for future tax policy. As has been widely discussed, some of those in support of the petitioners are hoping for a more significant ruling that could preemptively strike down future legislation. Callas says that those supporters have made clear that they’re trying to get an advisory opinion ruling opposing a wealth tax through the back door. That’s not, he stresses, what section 965 is about.

While it’s often difficult to parse how a justice might be leaning during oral arguments, Callas is hopeful that at least two or three more conservative justices will ask questions skeptical of the petitioners. If he hears questions from the justices that describe the provision as the inclusion of previously deferred income, that would be a good sign. But, he says, focusing on the word realization “makes me more nervous.”

Agarwal agrees, noting that he hopes to hear some questions that test the petitioners and push back on some of their arguments. He also expects some engagement on the practical implications of the case, noting that Supreme Court cases can often have an impact that reach beyond the immediate issue.

Callas will also be looking for questions that reveal the framing of section 965. A considerable portion of his brief focuses on that history, going back to 2011 when members of Congress were trying resolve some of the problems with multinational corporations that the TCJA also sought to address.

If the focus is on the broader arguments made by the petitioners, Callas believes that it would weaken the chances that they will prevail. It could be difficult for the petitioners to explain why other parts of the tax code (like the taxation of pass-through entities and global intangible low-taxed income, or GILTI, provisions) are Sixteenth Amendment compliant under some of their arguments—and he would expect skepticism from the justices that those other parts of the tax code could be distinguished.

Additionally, a broad Supreme Court ruling favoring the petitioners would result in chaos, says Callas. And a Justice Roberts-led court “is not going to want chaos.”

A worst-case scenario, according to Callas, would be to see the Court take Moore’s theory literally. A best-case scenario, he suggests, would be to see some of the conservative justices on the Court trying to find their way to a narrow ruling. There is, he claims in his brief, only one answer: the text of Section 965(a) is clear and does not violate the Constitution.

More Info

The case is Moore v. United States.

You can read Callas’ amicus brief here. Other amicus briefs can be found on the docket available on the Supreme Court website.

Oral arguments are scheduled for Tues., Dec. 5, 2023, at 10 a.m. ET. An audio feed will be live-streamed, and the audio will be available on the Supreme Court’s website later in the day. The Forbes tax team will also have coverage of the arguments.

The post Supreme Court Will Hear Case That Could Upend The Current Tax System appeared first on Financial Level.

Tax Notes chief correspondent Amanda Athanasiou discusses the growing global popularity of carbon border adjustment mechanisms, the EU’s new regime, and how border adjustments can be used to support carbon pricing and environmental policy.

This transcript has been edited for length and clarity.

David D. Stewart: Welcome to the podcast. I’m David Stewart, editor in chief of Tax Notes Today International. This week: Price adjustment.

With governments looking to cut carbon emissions to fight off the worst effects of climate change, they face a dilemma on what to do about products imported from countries that aren’t taking action. Enter the carbon border adjustment mechanism (CBAM), a controversial solution to a tricky problem.

Joining me now to talk more about this is Tax Notes Today International chief correspondent Amanda Athanasiou. Amanda, welcome back to the podcast.

Amanda Athanasiou: Thanks so much for having me. It’s great to be here.

David D. Stewart: So let’s start from the top. What is a carbon border adjustment mechanism?

Amanda Athanasiou: Broadly, these mechanisms are a way for governments that have implemented some sort of carbon pricing to protect their domestic economies and industries from competitiveness concerns that can arise when a carbon price is introduced, and to preserve the environmental benefits that they sought to achieve with the carbon price in the first place.

So when a carbon price is imposed in one country, carbon leakage, which is just the movement of emissions offshore, can occur as products from jurisdictions with less-stringent environmental policies are now cheaper and more desirable. It can also occur because industries and producers with more carbon-intensive operations are either going to move their activities to areas where carbon is less costly, or they just aren’t going to invest in that country in the first place.

So a carbon border adjustment mechanism is a way for governments to try to make sure that imports will face a carbon price that’s equivalent to what domestic producers face. What that generally looks like is that a fee is applied to imports based on the product’s embedded emissions with an offset for carbon prices that are paid in the country of origin.

David D. Stewart: Now let’s take one quick step back and talk about what sort of methods are they using to attach a price to carbon.

Amanda Athanasiou: Sure. So at the national level, there are two popular forms of carbon pricing. One is a carbon tax, so just a rate applied per metric ton of emissions. And the other is an emissions trading system (ETS), which is also known as cap and trade. And generally how that works is that there’s an overall limit set for the maximum amount of emissions in the system. And facilities covered by the system get allowances for a certain amount of pollution that they can emit. And those facilities can either emit up to their limit or reduce their emissions and sell their surplus allowances to other firms. That’s sort of generally how it works.

Of the two, carbon taxes are generally considered to be easier to understand, easier to administer. They provide more price certainty, and they raise revenue for governments. But they are often politically less popular than an ETS, and they provide less control to administrations over how much pollution is continuing to be emitted.

David D. Stewart: Now, what countries are currently exploring [CBAMs?]

Amanda Athanasiou: So besides the EU, which is the furthest along in its process — it’s actually begun implementing a CBAM — jurisdictions that have signaled that they’re considering implementing one include Australia, which is in the middle of a review and consultation process on carbon leakage. Canada has consulted on a CBAM. The U.K. is considering one. Norway said this fall that it’s considering whether to implement the EU CBAM. There have been proposals for legislation in the United States as well.

So that’s quite a few, but there are many more countries that have carbon pricing in place, that are also probably at least thinking about how to manage carbon leakage and competitiveness risks as well.

In November, a European Commission official said that because of the EU’s carbon pricing regime and their CBAM, many dozens of jurisdictions are now expressing interest in ETS systems and their own CBAMs. So we could see more proposals in the not-so-distant future.

David D. Stewart: Now, since it’s one of the larger jurisdictions that [is] dealing with the CBAM, could you first tell us about, what are they doing to price carbon there?

Amanda Athanasiou: Sure. So the EU has had an operational emissions trading system in place since 2005. Estimates for the proportion of the region’s harmful emissions that are covered by that system range right around 40 percent.

And at the beginning of this year, a record price for allowances was reached at just over €100 per metric ton of carbon dioxide equivalent. By the end of October, that had dropped to around €80.

There have been a number of reforms to the ETS just this year, including an increase in the ambition of the system in terms of reducing emissions in covered sectors. The goal is now a 62 percent reduction by 2030, instead of the previous 43 percent. The reforms also addressed the planned gradual phaseout of free allowances for sectors that are covered by the CBAM, as the CBAM is gradually phased in.

David D. Stewart: Where do things stand with the EU CBAM?

Amanda Athanasiou: The recent reforms that I just mentioned included the establishment of the CBAM. That regulation came into force in May. And the system entered a transitional phase on October 1, which will last quite a while, through the end of 2025.

In this first phase, importers of goods from non-EU countries will need to report embedded emissions and the products that they’re bringing in that are covered by the CBAM. So aluminum, cement, electricity, fertilizers, hydrogen, iron, and steel. But there won’t be any amounts due this period.

EU officials basically are looking at this period as a time to check the impact of the system without it actually having any impact. The first CBAM reports will be due for the fourth quarter of 2023, and the deadline during the transition phase is going to be one month after the end of each quarter. So the first one of those is coming up January 31, 2024.

And once the system is fully launched in 2026, importers will need to surrender certificates corresponding to the embedded emissions and imported goods. The price of those certificates will be tied to the auction price of ETS allowances. And then of course, carbon prices paid in the country of origin will also be part of the equation, and will generally be deducted from the amount due.

David D. Stewart: Do we have a sense of which countries might be on the receiving end of additional charges from the CBAM?

Amanda Athanasiou: Countries like China and the U.K., Turkey, Russia, and the United States are actually among the top exporters of CBAM products to the EU, and they could therefore be considered among the most affected by the mechanism. But they aren’t necessarily the hardest hit or the most vulnerable, given that their economies aren’t as heavily dependent on their EU CBAM exports as others.

So when we’re looking at countries that will be on the receiving end of this, it’s useful to look at the share of a country’s total exports that are exposed to the mechanism, rather than overall trade volume. And when viewed through that lens, many of the affected countries are low-income and developing countries, many of them in Africa.

A report this year from the African Climate Foundation and the London School of Economics and Political Science estimated that the CBAM’s effect on African countries as a share of GDP would be larger than in any other region, since the EU is such an important export market for CBAM-covered goods for the region, and because it’s more carbon-intensive to produce those goods in Africa.

So the disproportionate effects of the CBAM on certain countries have led to both optimism that the mechanism might encourage those countries to adopt their own carbon pricing mechanism and harness some of that extra revenue for their own administrations, but also complaints that it could widen the wealth gap, that it discriminates against countries least able to reduce harmful emissions, and that it goes against the common but differentiated responsibility principle referenced in the Paris Agreement.

David D. Stewart: Now since this is a charge at the border, does CBAM have any implications for free trade? And if so, is this something that the World Trade Organization is getting involved in?

Amanda Athanasiou: Well, that’s a really good question. Trade without discrimination is one of the key principles of WTO agreements. And countries generally can’t discriminate between trading partners with respect to like products by, for example, giving one country a favorable customs duty rate and not doing that for other WTO members. So that’s the most favored nation rule.

So the concern is that CBAMs could violate this nondiscrimination principle. Now, most countries considering a CBAM have included disclaimers in their consultations and their drafts saying that the country is committed to their international trade obligations. And if they were to adopt a CBAM, it would have to be designed in compliance with WTO rules. But none have really been put to the test so far.

The EU, which is arguably the most likely to face a challenge, just because their measure is the farthest along, has maintained that its CBAM is not a tax, it’s an environmental measure, and it targets goods rather than countries.

But at the same time, they’ve acknowledged that the WTO may be called upon to put an end to this debate once and for all if the measure is challenged. So that’s one where we’ll have to wait and see.

David D. Stewart: Has the U.S. taken a position on the proposals?

Amanda Athanasiou: It’s sort of been an ongoing open issue in the United States. Over the last few years, there have been some signals that at least some policymakers might be willing to consider a CBAM in response to the growing popularity of the measures.

In 2021, the U.S. trade representative made a broad statement that the Biden administration would consider a CBAM as part of its approach to reducing emissions. There have been several bills introduced from U.S. lawmakers that have included some form of CBAM or precursor, and even carbon taxes, but nothing really has gotten close to a finish line. It’s become pretty clear that the U.S. is not going to have a domestic national carbon price any time soon.

But there have been some comments from those that are following this closely, to the effect that support for some kind of responsive measure could grow as the EU CBAM has now begun its rollout. So this is another area to watch.

David D. Stewart: All right. Well, it sounds like there’s a lot of things to keep an eye on. Amanda, thank you so much for being here.

Amanda Athanasiou: Thank you for having me. It’s always a pleasure.

The post Taxing Carbon At The Border appeared first on Financial Level.

Topline

The Supreme Court will hear oral arguments Tuesday in a case concerning whether a couple had to pay taxes on an investment they didn’t profit from — potentially calling a significant number of provisions in the tax code into question and thwarting Democrats’ efforts to impose a wealth tax on the richest Americans depending on how the court rules.

Key Facts

What To Watch For

The court will hear oral arguments in the case Tuesday, though a ruling is not expected for several months, sometime before the court’s term ends in June 2024.

Big Number

$340 billion. That’s how much a ruling that invalidates the MRT could cost the federal government over the next decade in lost tax revenue, the Justice Department said in a court filing. If the Supreme Court were to issue a broader ruling that affected all undistributed business earnings — meaning all corporate earnings, foreign and domestic, that aren’t paid out to shareholders but are instead kept within the company — rather than just unrealized income through the MRT, a study by the Tax Foundation estimated it could reduce federal tax revenue by nearly $5.7 trillion over the course of a decade.

Chief Critics

Some tax experts have criticized the Moore case as using the couple’s dispute as a vehicle to stop a future wealth tax. Tax law professor Donald Tobin told blog Law Dork, “I think the idea that we may totally upend the entire Internal Revenue Code based on the fact that someone is afraid that sometime in the future there might be a wealth tax is a huge mistake.” Steven Rosenthal, senior fellow at Urban-Brookings Tax Policy Center, told the Guardian that “the billionaires financing the litigation are the real parties of interest” in the case, rather than the Moores. (The Moores’ case is being backed by Competitive Enterprise Institute, a libertarian think tank funded in part by the Charles Koch Foundation.)

Key Background

The Moores brought their case to the Supreme Court after losing at both the federal district and appeals courts, which held the federal government was within its rights to tax the Moores’ KisanKraft shares under the Sixteenth Amendment, which gives Congress its taxation powers. The appeals court noted the potential economic ramifications in its ruling for the government, writing that ruling in favor of the Moores would “call into question the constitutionality of many other tax provisions that have long been on the books.” Taxes on the ultrarich have become a popular proposal on the left in recent years, with Sen. Elizabeth Warren (D-Mass.) making a wealth tax on households with a net worth of more than $50 million a central issue of her 2020 presidential campaign. President Joe Biden separately proposed a “Billionaire Minimum Income Tax” on households worth more than $100 million in March 2022, which would require the top earners to pay a tax rate of at least 20% on their full income, including their unrealized capital gains. Proponents argue taxing top earners would force the wealthiest Americans to pay their fair share in taxes while also producing much-needed government revenue — the Biden administration estimates its tax would reduce the federal deficit by $360 billion over the course of a decade — but Democrats’ proposals face long odds of ever coming to fruition given Republican opposition.

Tangent

The Moore case has also drawn attention for how it’s intersected with the ongoing ethics controversy at the Supreme Court. Justice Samuel Alito rejected calls from Democratic lawmakers to recuse himself from the case, after one of the attorneys arguing the case, David Rivkin, conducted interviews with Alito that were published in the Wall Street Journal. Alito claimed there was “no valid reason for my recusal in this case,” claiming Rivkin participated in the interviews “as a journalist, not an advocate.” Additionally, one of the the groups that has filed amicus briefs encouraging the justices to side with the Moores is the Manhattan Institute, which argued against a wealth tax in its filing, saying such a policy would “undermine fundamental principles of economic liberty, discouraging entrepreneurship, innovation, and upward mobility.” The organization’s leadership and trustees, the Guardian noted, includes billionaire hedge fund Paul Singer — who invited Alito on a luxury fishing trip that raised ethics concerns — and the wife of Harlan Crow, the real estate magnate who has drawn widespread controversy after a series of reports detailed how he’s treated Justice Clarence Thomas to years of luxury travel, funded his grand-nephew’s school tuition and bought real estate from the justice.

Contra

The American College of Tax Counsel sought to distance the case from the debate over a wealth tax in an amicus brief with the court, arguing the Supreme Court can issue a ruling that narrowly decides the Moores’ case “without proactively weighing in on the constitutional parameters of wealth taxes.” Calling the MRT “conceptually distinct from wealth taxes in important ways,” the organization argued that the issue of whether or not a wealth tax is constitutional would “likely turn on the specific details of the actual wealth tax before the Court.” “It may be that such a wealth tax would in fact run afoul of the Constitution,” the organization wrote. “But these are not the questions before the Court today.”

Surprising Fact

Critics of the Moores’ lawsuit have called for their case to be thrown out, because records suggest the couple has closer ties to the Indian company they invested in than their lawsuit suggests. While the lawsuit claims the couple only invested $40,000 in KisanKraft, records reported by Tax Notes claimed the Moores actually committed $400,000 to the company, and Charles Moore served as a director for the company. “I’m confident that our filings are candid and accurate,” the Moores’ attorney Dan Greenberg said in a statement to the Washington Post about the reported discrepancy.

Further Reading

Supreme Court Will Hear Case Targeting Tax On Unrealized Gains (Forbes)

Moore Money, More Tax Problems? Analyzing Moore V. United States (Forbes)

In SCOTUS Moore Case, Taxation Without Receipt Of Cash Is Fair Game (Forbes)

Samuel Alito Refuses To Recuse From Supreme Court Case With Attorney Who Interviewed Him For Wall Street Journal (Forbes)

The post Supreme Court Is Hearing A Landmark Tax Case Today — Here’s Why It Could Destroy Democrats’ Wealth Tax Plans appeared first on Financial Level.

Swiss private bank Banque Pictet et Cie SA has admitted that it conspired with U.S. taxpayers and others to hide more than $5.6 billion in 1,637 secret bank accounts in Switzerland and elsewhere, and to conceal from the IRS the income generated in those accounts. The bank entered into a deferred prosecution agreement and agreed to pay approximately $122.9 million to the U.S. Treasury. It is almost 2024 now, but these cases go back to Justice Department investigations since 2008 into facilitation of offshore U.S. tax evasion by foreign banks.

“As it has admitted today, Banque Pictet knowingly conspired to conceal from the IRS the income generated by accounts which held more than $5.6 billion,” said U.S. Attorney Damian Williams for the Southern District of New York. “Thanks to the hard work of the career prosecutors of this Office and our law enforcement partners, Banque Pictet has agreed to pay more than $122.9 million and will continue to cooperate with the Department of Justice. Rooting out financial malfeasance remains a priority for this Office, and we encourage companies and financial institutions to come to us to report wrongdoing before we come to you.”

“This case should provide a clear message to others who try to hide their assets and income offshore. Our special agents are experts in following the money, and they are the best at uncovering schemes that try to defraud the U.S. tax system,” said IRS Criminal Investigation Chief Jim Lee. “Offshore tax evasion is a priority for IRS Criminal Investigation, and today’s deferred prosecution agreement with Bank Pictet collects more than $120 million owed to the U.S. government.”

According to court documents, The Pictet Group was founded in 1805 and is a privately held Swiss financial institution headquartered in Geneva that has historically operated as a general partnership and, since 2014, as a corporate partnership. A limited number of managing partners, generally eight or fewer, collectively known as “The Salon,” own and manage the Pictet Group.

As of Dec. 31, 2014, the Pictet Group had approximately 3,800 employees in various locations, primarily in Switzerland, but also in Luxembourg, Hong Kong, Singapore and the Bahamas. The Pictet Group operates two main business divisions: institutional asset management and private banking for individuals.

From 2008 to 2014, Pictet Group’s private banking division was operated by the group’s following banking entities: the Swiss bank (Banque Pictet & Cie SA); Pictet & Cie (Europe) SA, headquartered in Luxembourg; Bank Pictet & Cie (Asia) Ltd. in Singapore and the Bahamian bank, Pictet Bank & Trust Ltd. The Pictet Group provided offshore corporation and trust formation and administration services to certain U.S. taxpayers, first through the Estate Planning and Trust Services unit and later through a wholly owned subsidiary called Rhone Trust and Fiduciary Services SA (Rhone).

As of Dec. 31, 2014, the Pictet Group’s private banking division managed or held custody of approximately $165 billion in assets under management (AUM). From 2008 to 2014, the Pictet Group served approximately 3,736 private accounts that had U.S. taxpayers as beneficial owners, whose aggregate maximum AUM, including declared assets, was approximately $20 billion.

Although Pictet Group adopted early measures to confirm that U.S. clients complied with U.S. law, from 2008 through 2014, the Pictet Group assisted certain U.S. taxpayer-clients with Pictet Group accounts in evading their U.S. tax obligations and otherwise hiding undeclared accounts from the IRS.

In total, from 2008 through 2014, the Pictet Group held 1,637 U.S. Penalty Accounts with aggregate maximum AUM of approximately $5.6 billion in January 2008, on behalf of U.S. taxpayer-clients, who collectively evaded approximately $50.6 million in U.S. taxes. The Pictet Group assisted U.S. taxpayer-clients with evading their U.S. taxes by opening and maintaining undeclared accounts for U.S. taxpayer-clients at the Pictet Group, either directly or through external asset managers.

The Pictet Group also maintained accounts of certain U.S. taxpayer-clients within the Pictet Group in a manner that allowed the U.S. taxpayer-clients to further conceal their undeclared accounts from the IRS. The Pictet Group and certain of its employees knew or should have known that some of their U.S. taxpayer-clients were evading U.S. taxes. In every instance, managing partners approved the opening of new private client relationships and were informed of the closing of U.S. taxpayer-clients’ accounts, which included some undeclared accounts.

The Pictet Group used a variety of means to assist U.S. taxpayer-clients in concealing their undeclared accounts, including by:

• forming or administering offshore entities in whose name the Pictet Group opened and maintained accounts, some of which were undeclared, for U.S. taxpayer-clients;
• opening and maintaining undeclared accounts in the names of offshore entities formed by others for U.S. taxpayer-clients;
• opening and maintaining Private Placement Life Insurance policy accounts, also called insurance wrappers, held in the name of insurance companies but beneficially owned by U.S. taxpayers and improperly managed or funded through undeclared accounts at the Pictet Group;
• transferring funds from undeclared U.S. taxpayer-client accounts to accounts nominally held by non-U.S. clients but still controlled by U.S. taxpayer-clients via fictitious donations, thus assisting U.S. taxpayer-clients in continuing to maintain undeclared funds offshore;
• providing traditional Swiss banking products such as hold-mail account services, where account-related mail is held at the bank rather than sent to the client, and coded or numbered accounts and
• accepting IRS Forms W-8BEN or Pictet Group’s substitute forms that the group knew or should have known falsely stated or implied under penalty of perjury that offshore entities beneficially owned the assets in the undeclared accounts.

The $122.9 million Banque Pictet agreed to pay to the U.S. Treasury pursuant to the deferred prosecution agreement consists of (i) $52,164,201 to the United States, which represents gross fees (not profits) that the bank earned on its undeclared accounts between 2008 and 2014; (ii) $31,844,192 in restitution to the IRS, which represents the unpaid taxes resulting from Banque Pictet’s participation in the conspiracy and (iii) a $38,950,998 penalty. The Bank further implemented remedial measures to protect against the use of its services for future tax evasion.

In addition to the payment, Banque Pictet also agrees under the deferred prosecution agreement to accept responsibility for its conduct by stipulating to the accuracy of an extensive statement of facts. Banque Pictet further agreed to refrain from all future criminal conduct, implement remedial measures and cooperate fully with further investigations into hidden bank accounts. If Banque Pictet continues to comply with its agreement, the United States has agreed to defer prosecution of Banque Pictet for a period of three years, after which time the United States will seek to dismiss the charge.

The post Swiss Banque Pictet Admits Conspiring With Americans To Hide Funds appeared first on Financial Level.

Want to know why the budget deficit is enormous and growing? One reason is that when one political party in Congress proposes new tax cuts or new spending, the other party offers its own deal in return: We’ll accept your tax cuts and new spending but only if you agree to ours. And neither side tries to offset the costs with new revenues or spending cuts.

To see how it works, watch two classic examples as Congress scrambles to wrap up its work for the year.

First, there is the “emergency” international aid bill the Senate may consider as soon as next week. The plan, now exceeding $100 billion, will package an assortment of initiatives to satisfy the demands of both parties by, as usual, running up the deficit.

The Meaning Of Emergency

To start, there is that word “emergency,” which in Congress-speak usually means unanticipated expenses to respond to urgent events such as natural disasters or pandemics. Those situations require immediate action that cannot wait for lawmakers to agree on financing, and thus they raise the deficit.

But little in this package was a surprise.

True, the $14 billion in military aid to Israel and the humanitarian assistance for Gaza could not have been anticipated. But the vast bulk of the new money was completely expected.

The Biden administration’s proposal for another $61 billion in Ukraine aid was just the latest tranche in its multiyear effort to defeat the Russian invasion. Similarly, Biden has been lobbying for more Taiwan funding as it tries to neutralize China’s regional saber-rattling. And Republicans have been pushing for more border security funding for years.

While there is broad support on Capitol Hill for aid to Israel and Taiwan, the rest of the package requires trade-offs to satisfy costly demands of both parties. Rolling hard-to-pass international assistance into a single bill is a political convenience that creates a grand opportunity for budget-busting dealmaking.

Doing It All

Democrats want humanitarian aid for Gaza but most Republicans don’t. Republicans want more money for U.S.-Mexico border security but many Democrats don’t. Democrats want more military support for Ukraine but some Republicans don’t.

What is Congress likely to do? Pass all of it. Republicans will swallow Gaza and Ukraine aid in return for Democrats agreeing to more border security money. And everybody gets the Israel and Taiwan assistance they want.

Each of these initiatives may have merit. But adding another $100 billion to a projected fiscal year 2024 deficit of $1.6 trillion, with no serious thought of paying for it, is bipartisan irresponsibility.

House Republicans have made an even worse choice. They agreed to fund $14 billion in military aid for Israel. But they claimed they were paying for it by cutting funding for IRS enforcement and other activities by $14 billion.

There is just one problem: The Congressional Budget Office figures cutting the IRS budget by $14 billion would add another $13 billion to the deficit since it would make it harder for the agency to collect taxes that are already owed. Thus, the total actual cost of $14 billion for Israel: nearly $27 billion. Only in Washington.

Back-Scratching On Taxes

And speaking of taxes, lawmakers also are dancing around a similar I’ll-scratch-your-back-if-you-scratch-mine deal on the revenue side. For a year, Republicans have been trying to convince Democrats to fix four corporate tax increases the GOP put into the 2017 Tax Cuts and Jobs Act. Those fixes could cost $47 billion through 2025. Democrats are willing to back the changes but insist Republicans agree in return to expand the Child Tax Credit. That step could add up to another $45 billion to the deficit through 2025, though some reforms could be achieved for less.

And keep in mind that lawmakers say they want to make these tax changes only through 2025, when the individual provisions of the TCJA are due to expire. But they really want to make the changes permanent, which could add $800 billion to the deficit over the next decade, according to the Committee for a Responsible Federal Budget.

As with the spending proposals, these tax changes may have merit (some of them, at least). But they should be paid for with tax increases or spending cuts.

Instead, many lawmakers on both sides of aisle seem to think they can satisfy concerns about rising deficits by creating a new bipartisan commission to recommend ways to address the federal debt sometime in the future. Given Congress’s incurable infatuation with more spending and endless tax cuts, any commission is doomed to fail.

If ever there was a time to confront the enormous federal debt, it should be now. The economy is strong enough to tolerate fiscal restraint. And interest rates are high, thus raising the cost of servicing the growing debt. Yet, even as they nod to the need for deficit reduction, lawmakers of both parties are making fiscal matters worse.

The post Despite Deficit Handwringing, Congress Proposes More Spending And Tax Cuts appeared first on Financial Level.

They show up in celebrity divorces (think Kevin Costner), big bankruptcies (think FTX) and financial fraud cases. But you don’t have to be famous to benefit from the help of a deep diving accounting pro.

_{By Kelly Phillips Erb, Forbes Staff}

As a stay-at-home mother of three involved in a nasty divorce, the Virginia woman saw early on in the process that her soon-to-be ex-husband had the advantage. The business he owned had been supporting the family. Now, she realized, she knew next to nothing about its revenues and likely value. And so she resorted to what has long been a go-to move in high dollar business disputes, celebrity break-ups and big bankruptcy cases: she hired a forensic accountant.

Cheryl B. Hyder, a Fairfax, Virginia, practitioner, not only uncovered information that proved crucial to the court ordered division of marital assets, she also explained the numbers in layperson’s terms. The divorcee confides she couldn’t really afford to have Hyder testify in court (she charges about $400 an hour for court appearances) and fortunately, she didn’t need to. The CPA’s written analysis was enough to persuade the judge that more resources were available for support than her ex previously claimed. “Whoever controls the data, controls the narrative,’’ says the woman, who asked not to be named since her divorce was so contentious.

Hyder earned a masters in tax, but began shifting into forensic work in the 1990s because, she says, she likes “the challenge of taming financial chaos” and communicating what she’s uncovered in a way that interested parties can understand. (Perhaps not so coincidentally, she volunteers with a pit bull rescue group, serving as a “breed ambassador” and fostering dogs.) These days, more than half her cases involve divorces, but she still works on everything from commercial litigation to fraud investigations.

Ultimately, the tab for a forensics expert in a divorce case, with the meter typically running at $300 to $500 or more per hour, can range from $5,000 to hundreds of thousands. But with Baby Boomers increasingly getting divorced late in life when they’ve already built substantial assets, and the internet making it easier than ever to move money around, it’s a cost more of those involved in splits are finding worthwhile.

It’s not just divorce creating a growing demand for forensic accountants. The Association of Certified Fraud Examiners (ACFE) now counts more than 62,000 active Certified Fraud Examiners (CFEs) around the world — an 18% increase since 2018. A significant portion of the CFEs, who must pass a four part exam, are accountants.

These days, the numbers-focused gumshoes do everything from valuing privately owned business interests and quantifying damages to tracking assets hidden offshore and in domestic trusts to dissecting financial frauds and even tracking cryptocurrency associated with those frauds. They work within corporations to remediate fraud risk and are frequently brought into the more spectacular corporate bankruptcies. The FBI even has a special job title and training program for forensic accountants.

For those working in the private sector, the fees can be substantial. AlixPartners, LLP, the lead forensic accounting firm hired in the bankruptcy case involving crypto exchange FTX and its dozens of affiliates, has billed more than $39 million in fees and expenses in less than a year. Its FTX team is led by Matthew Jacques, a former chief accountant for the enforcement division of the Securities and Exchange Commission, who now charges a hefty $1,280 an hour. (That’s just shy of the $1,300 an hour turnaround veteran John J. Ray is charging as FTX’s CEO..)

Prosecutors hired their own outside forensic expert for the successful criminal prosecution of FTX founder Sam Bankman-Fried. Peter Easton, an accounting professor at the University of Notre Dame, laboriously traced where $9 billion of missing FTX customer funds went. Among other things, the money was invested in businesses and real estate, used to make political contributions, and donated to charity, he testified. As one report of the trial noted “This was a numbers heavy bit of testimony. At one point, a juror could be seen with the fingers of both hands pressed against his temples.”

While it may not seem daunting compared to untangling the FTX mess, when forensic accountants are on the job, even a divorce case can involve extensive analysis of assets (known and hidden), income (current and potential) and spending (necessary and over-the-top).

Consider the prominent supporting roles forensic accountants played in the recent divorce of Yellowstone star Kevin Costner. His ex, Christine Baumgartner, filed for divorce in May 2023 after nearly 19 years of marriage. The couple had a prenuptial agreement and the case was ultimately settled out-of-court in September–but only after months of haggling in court over child support, among other issues. She was originally awarded $129,000 a month in child support and in August requested that be boosted to $175,000, saying it was necessary to allow their three teenagers to continue to live in the luxurious style they were accustomed to. Her forensic accountant, Jill Bombino, of CMM LLP, provided an analysis showing Costner could afford it—he had cash flow in 2021 and 2022 averaging $19.2 million per year.

But Costner’s forensic accountant, Tracy Katz of Gurney Schneider LLP, dissected the family’s $240,000 monthly expenses and backed out items solely attributable to Baumgartner (as opposed to the children). Those, Katz testified, included spending of $3,000 a month on beauty products and treatments and $18,000 a month on designer clothing.

The judge ended up knocking down child support to $63,000 a month, in addition to requiring Costner to pick up all the kids’ medical costs, school tuition and extracurricular expenses, including hunting club dues. The judge was apparently persuaded, in part, by the opinion of Costner’s forensic pro that his income should be properly evaluated without the extraordinary (and now ending) Yellowstone payday, in which case, she calculated, his cash flow was less than half a million a month. Before settling, the unhappy couple also sparred over whether Costner would have to pay hundreds of thousands in both forensic accounting and legal fees for Baumgartner.

Analyzing spending is harder and more time consuming than you might think, says Claudio Martellacci, Lead Partner in the Valuations and Litigation Support practice at Grewal Guyatt LLP, a Canadian accounting firm. It requires not only breaking out big-ticket items like mortgage payments, car leases, and vacation expenses, but itemizing smaller ones, down to the cell phone bill and dog food costs. Typically, that analysis would involve combing through supporting documentation like invoices and receipts to identify spending patterns over time.

Establishing patterns is key whether the forensic accountants are looking at simple (if extravagant) spending or actual fraud, observes David Levy, a partner at Kleinberg Kaplan in New York, who specializes in complex litigation and leans heavily on forensics in some trials. “It’s indispensable in our world,” he says, noting that when he cannot find actual evidence of willful conduct, he needs to rely on piecing together how the money was moved. Those patterns can sometimes be enough to impute bad faith– or lead to bigger discoveries.

The same is true, of course, for so-called business divorces. Companies or former partners that are in conflict may often disagree about current holdings, as well as future expected income. It may be tempting for one party to hide those future income streams, even going so far as to park income in holding companies or offshore. A good forensic accountant can trace transactions and pick up on clues that lead to discovering those sources of previously hidden income.

Levy retained Hyder as one of two forensic accountants he used in a particularly nasty Florida divorce. In that case, his client had inherited a substantial portfolio before marriage, including real estate in Florida and New York. Her ex-spouse did not come from money and the pair had a prenuptial agreement keeping her wealth–and the couple’s finances–separate. On paper, she had done everything right to protect herself.

But over the period of more than a decade, the then-husband was able to siphon money from his wife’s holdings with the help of the couple’s accountant, who it turned out was in cahoots with him. Levy says the “boldness” of the bad acts was remarkable, but weren’t obvious until the forensic accountants created extensive spreadsheets laying bare the illicit transfers.

Even if they don’t find a smoking gun, the questions the forensic accountants raise can be useful in a divorce case, observes Lynda Hinkle Zurlo, a family law attorney in Southern New Jersey. “Judges infer things, especially when they don’t add up,” she notes. Financing an extravagant lifestyle on an apparent shoestring budget, for example, can raise eyebrows.

She’s most likely to recommend hiring a forensic expert when businesses are involved, particularly those where money is quick to change hands—real estate flips are a good example, she notes, since the money and assets have to be traced for each sale. She’s also inclined to bring one in when there are international holdings where records may be difficult to find. “I will always recommend an expert when an expert is needed,” she says.

Some of what a forensic accountant can unearth, she notes, like discrepancies that contradict what’s reported on tax returns, isn’t necessarily something the parties want to present to a judge (particularly if both sides signed a joint return and because in some instances, the judge might have to report it to the IRS). But that sort of radioactive information gives parties the push to settle or move to arbitration.

“Divorce can be complicated,” she says.

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Earlier this week, many businesses received an email with a header asking, “Did You Take the Necessary Steps Required to Access Business Services Online (BSO) Employer Services? The Filing Deadline for Wage Reporting is Approaching!” The e-mail included exhortations to “Act Now! Time is Running Out!”

This raised suspicions for some. A taxpayer forwarded it to me, asking, “Is this real?”

Yes, it’s real. Here’s what you need to know.

Taxpayer First Act

A few years ago, the IRS issued regulations requiring that information returns be filed electronically if a taxpayer must file 250 or more in a calendar year. The regulations provide that the 250-return threshold is applied separately to each type of information return covered under the regulations.

By 2019, over 98.8% of information returns were already filed electronically. That same year, Congress passed the Taxpayer First Act—it was signed into law by President Donald Trump on Jul. 1, 2019. The law focused on modernizing and improving the IRS.

One of the provisions of the Act (section 2301) sets the number of returns a filer may file without being required to file electronically at 10—down from 250—for 2024. The number remained fixed at 250 information returns for 2022 and 2023 (a tax preparer can apply for a waiver if they can’t file electronically due to lack of internet).

Earlier this year, the IRS issued final regulations amending the rules for filing returns and other documents electronically—among other things, the regs officially shrunk the electronic-filing threshold down to 10 for returns required to be filed on or after Jan. 1, 2024.

Information Returns

Information returns include Forms 1099 and W-2. What the new rules mean for taxpayers, including small businesses, is that if you file ten or more informational returns, you must file electronically unless the IRS grants a waiver or exemption.

(The good part: If you file electronically, there is no need to send paper documents.)

Employers must file W-2 forms with the Social Security Administration (SSA) and the IRS by Jan. 31 following the tax year. That means Tax Year 2023 wage reports must be filed with the Social Security Administration by Jan. 31, 2024.

To file electronically with SSA, you must have access to BSO, or Business Services Online. To use BSO, you have to register.

Business Services Online

BSO now requires additional levels of security to access employer services. Your prior BSO UserID and password can no be longer used to access BSO employer services. You must have a Social Security Online account, Login.gov, or ID.me credential to use the BSO application. You can use your existing Login.gov or ID.me credentials to log in. If you do not have a Social Security online account, a Login.gov, or ID.me credential, you will need to create one.

If you don’t have the proper credentials, you won’t be able to access services, including reporting wages on Form W-2, viewing submission and report status, and verifying Social Security numbers.

SSA suggests allowing at least two weeks for the registration process to be completed. That’s why they sent out the e-mail—if you don’t register in time, you may be unable to file your information returns by the deadline.

Help Is Available

To help taxpayers sort it out, SSA will host a series of virtual webinars on BSO’s new access and registration process on Dec. 6, Dec. 13, and Dec. 18, 2023. You can find out more information and register here—but don’t wait too long. As of this posting, the Dec. 6 webinar had already reached capacity.

SSA has a toll-free line to help employers with wage reporting questions or problems (it’s at 1-800-772-6270 or TTY 1-800-325-0778, Monday through Friday, 7 a.m. to 7:00 p.m., Eastern Time). You can also e-mail employerinfo@ssa.gov.

There’s also a toll-free line for questions about using Social Security’s Business Services Online website for filing Forms W-2 electronically (it’s at 1-888-772-2970, or TTY 1-800-325-0778, Monday through Friday, 7 a.m. to 7:00 p.m., Eastern Time). You can also fax 1-410-597-0237 or e-mail bso.support@ssa.gov.

If you need in-person help, type in your postal ZIP code here to find an office near you.

Forms 1099

If you need to file Forms 1099, you’ll do that through the IRS. To help, the IRS has created a free online portal called the Information Returns Intake System (IRIS). It’s available to any business of any size, but the IRS says it may be especially helpful to any small business that currently sends their 1099 forms on paper to the IRS.

The post Is That Social Security Email About Form W-2 Filing Changes For Real? appeared first on Financial Level.

If you have a big wad in a pretax IRA, sit down with your accountant now. Taxes are likely headed higher.

_{By William Baldwin, Forbes Staff}

Tax rates are going up. Do your conversions now. That’s a starting point in the complex game of IRA manipulation. But the general rule must be accompanied by footnotes and provisos. For these subtleties we turn to Robert S. Keebler, an accountant in Green Bay, Wisconsin, who has elevated tax bracket management into an art form.

Large sums are at stake. Keebler’s firm has had occasion to advise on eight-figure IRAs, with potential savings into the millions of dollars. For a prosperous but not wealthy upper-middle-class client, the difference between doing nothing and making the optimal moves could be a few hundred grand.

Roth conversion means the prepayment of income tax on some portion of your retirement account, leaving that sum immune to future tax. The time to think hardest about converting is when you are nearing or in retirement.

If you pay the tax from funds outside the account (the only rational way to go about this), and if your tax bracket in later years will be not much lower than it is now (often but not always true), a conversion is likely to leave you better off.

Where is your tax rate headed after you retire? Not necessarily down. For one thing, the required minimum distribution from any unconverted IRA may keep you in a surprisingly high bracket. Next, the Trump-era tax cuts of 2017 end on January 1, 2026. Finally, the budget deficit (recently $1.7 trillion) may force Congress to boost taxes even beyond the 2026 rates now on the statute books.

Make your own guess about who’s going to win the next election and what laws will be passed, but, Keebler says, “Any reasonable position would recognize that rates are more likely to go up than to go down.”

Here are some of Keebler & Associates’ Rothification schemes:

The Bracket Fill. The 24% federal rate applies on a married joint return to taxable income between $191,000 and $364,000. It might make sense to do just enough converting this year, and again in 2024 and 2025, to take advantage of this low rate. You fill the bracket but don’t go beyond it.

With an income in this range you will land in the 28% or 33% federal bracket in 2026. Now, your marginal rate—what you pay in tax on an incremental dollar of income—is not so simple. The kinky Pease limitation, resurrected from the crypt by the expiration of the 2017 law, will add roughly a percentage point to your effective federal rate. On the other hand, resi-dents of spendthrift states will again be able to deduct state and local income taxes.

Adding it up, upper-middle-incomers are likely to see a benefit from paying some IRA taxes now rather than later.

The time to think hardest about converting your pre-tax IRA to a Roth is when you are nearing or in retirement. 

The Trump Roll. With this maneuver you wait until December 2025 to see what Congress cooks up. If nothing, you convert a chunk of money at the low rates still in effect. Four months later you pay the year 2025 federal and state taxes on this sum. The state tax becomes deducti-ble on your 2026 federal return.

The Endgame. A widow worth $3 million wants to leave $1 million each to her two kids. With the remainder she aims to cover nursing care or, if she never needs that, a charitable bequest. She should leave that last $1 million in an unconver-ted IRA. When the money comes out it will be either offset by a medical deduction or exempt.

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Jeffrey Harmon of Lexington, S.C., was sentenced to 24 months in prison for preparing and filing false individual income tax returns for himself and his clients.

According to court documents and statements, Harmon owned and operated TFL Worldwide, a tax preparation business, in South Carolina. To reduce his and his clients’ tax liability, Harmon consistently deducted non-deductible personal expenses, including rent and mortgage payments for personal residences, personal vacation travel, personal fitness and golf equipment, and country and hunt club membership fees.

According to sentencing documents, Harmon used a coaching service to deliver what the feds described as “bogus tax advice to unsuspecting and relatively naïve customers who trusted what he told them.” The feds noted that Harmon had been a CPA and had been preparing tax returns since 1988 (an entry on the South Carolina Board of Accountancy indicates that his license lapsed years ago). His company, TFL Worldwide, Inc., was billed as a reputable consultant in proactive tax planning, business coaching, and seminar training. Harmon advised his clients on tax strategies, typically charging clients between $350 and $1,000 to prepare their tax returns. He charged up to $7,000 to prepare QuickBooks and for “business coaching.”

According to prosecutors, on his personal tax return, the married father of six consistently underreported his business income by falsely deducting items such as a swimming pool, golf cart, and Netflix
NFLX
as business deductions on Schedule C. Specifically, on each of his personal returns for the tax years 2012 through 2016, Harmon wrote off the rent for the home he lived in with his family as a business expense—approximately $30,000 a year. He described the rent deducted from each of his returns as “the twelve times during the year he rented the house from himself,” which he claimed was permissible under the Augusta Rule.

The Augusta Rule

The August Rule is another name for an exclusion found in section 280A of the tax code. The rule makes clear that if you rent your personal residence for fewer than 15 days, you do not report any of the rental income and do not deduct any expenses as rental expenses. However, if you rent your home for 15 days or more during the year, you would include all your rental income in your income.

The law, which has been around since 1976, is sometimes called the Augusta Rule, in a nod to the Masters, which is hosted by the Augusta National Golf Course each year in Augusta, Georgia. Local homeowners saw the income potential, but funds you receive for the use of real estate – even if it’s your personal residence – are usually taxable as rental income. It didn’t seem very sensible to require the inclusion of rental income for a short-term rental that was never intended to be treated as a business. The result was the 280A exclusion.

Remember that for a business expense to be deductible, it has to be necessary and ordinary. And even if an expense is ordinary and necessary, the cost is deductible only to the extent that it is reasonable in amount.

Impermissible Deductions On Personal Returns

According to the government, Harmon admitted that he knew that the Augusta Rule required an actual flow of funds and an arms-length transaction. As part of his coaching plan, he advised clients to get comparison rental values, execute lease agreements, and keep records of the rental use. But despite advising his clients of these steps, Harmon did not execute a lease, obtain “reasonable” rent quotes for other facilities, or keep records to justify his annual $30,000 write-off of his home as a business expense.

On his personal returns for the tax years 2012 through 2014, Harmon reported business expenses on his Schedules C for employee benefit programs. These expenses were classified as “Medical” in his QuickBooks. These were from personal medical expenses, such as purchases from CVS, Walgreens, Walmart
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, dermatologists, eye doctors, and other physicians. Because he was self-employed, Harmon was not entitled to a deduction for a self-insured medical reimbursement plan. In fact, he advised his clients, “If you run your business as a proprietorship, partnership, LLC, or ‘S’ corporation, you’re considered ‘self-employed,’ and not eligible.”

Finally, on his personal returns for the tax years 2012 through 2015, Harmon deducted “[u]tilities” on his Schedule C that were actually for his personal residence. These expenses included payments for water in 2012 and for TV and movies, including DirecTV, Netflix, and Amazon
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, each year.

Client Returns

Harmon was also accused of mischaracterizing personal expenses as business expenses on client returns, including claiming rental expenses for personal residences and deducting all meals and travel expenses (those are subject to limits). According to court documents, there were also other improper deductions, including insurance, legal and professional services, utilities, cost of goods sold, office expenses, gifts, supplies, and memberships.

Generally, the clients indicated they provided documentation such as bank and credit card statements to Harmon who would prepare their returns without ever going over those line items. Harmon also advised clients that they could rent their personal residences—using the Augusta Rule—to their Schedule C businesses and claim it as a business expense. Most of Harmon’s clients indicated that they did not do anything to “rent” their house to their business—they did not sign a lease or contract, did not write checks to pay for the rentals, did not research comparable rates, and did not provide Harmon with any figure as to what the rental rate would have been.

Sometimes, clients stated that Harmon classified personal expenses as business deductions without their prompting or knowledge.

Prosecutors wrote, “[p]reparation for the prosecution of Harmon was one of the most complex, convoluted ordeals this prosecution team has been through.” They indicated that Harmon covered his tracks by burying deductions and making false annotations on tax returns and schedules.

While pushing for a significant sentence, the government noted, “Nefarious tax avoidance schemes abound, particularly in the age of social media, where misapplication of the Augusta Rule and other creative (and illegal) strategies proliferate. Every prosecution of an unethical and fraudulent tax preparer pushes this trend back in the proper direction, but only if the consequences are significantly punitive.”

In total, the U.S. suffered a tax loss of $53,639 for Harmons’ personal returns and $266,366 for his clients, for a total tax loss of $320,005.

Plea And Sentencing

On April 21, 2023, Harmon pleaded guilty to one count of filing a false tax return and one count of aiding and assisting in the filing of a false tax return.

In addition to 24 months in prison, Harmon was ordered to serve one year of supervised release and to pay $320,005 in restitution to the United States.

IRS-CI

IRS-CI investigated the case.

IRS-CI, the sixth-largest law enforcement agency in the U.S., is the criminal investigative arm of the IRS, responsible for conducting financial crime investigations like tax fraud, narcotics trafficking, money laundering, public corruption, healthcare fraud, and identity theft. While other federal agencies also have investigative jurisdiction for money laundering and some bank secrecy act violations, IRS is the only federal agency that can investigate potential criminal violations of the tax code.

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