Tax Evasion: What's Really Going On?
No one likes paying taxes to the government or having money taken out of their paycheck, right? American businesses have this same feeling and have devised a plan to avoid paying taxes, except any illegal way of avoiding taxes is called tax evasion ("Tax Evasion."). The reason tax evasion is mostly under International accounting is because almost all of the loopholes to avoid taxes involve moving money or assets to another country. I will be explaining a few of these loopholes in this article.
One of the most well known country’s for tax evasion would have to be Switzerland; for many years it has been a safe haven for individuals and company's that want to avoid taxes (Saunders). Until recently the United States government hasn’t really narrowed their focus on this problem. This recent crack down has discovered more than 54,000 accounts that are over seas and belong to American taxpayers (Saunders). In order to correct back-taxes with the IRS, these accounts resolved their debt by paying in total over 8 billion dollars (Saunders).
It is evident that tax evasion is possible and can be a huge revenue loss for the United States if left unnoticed, but you may be asking how exactly is it done? There are multiple ways individuals and companies find loopholes. Sometimes companies may transfer only a small portion of funds to an offshore account in order to slide into a lower tax bracket. They also may transfer less then $10,000 to offshore accounts at a time so the government will not become suspicious. Most of the time loopholes have to do with under reporting total income, but sometimes it may have to deal with stock option too. This is the case when we take a look at, businessman, Sam Wyly (Avi-Yonah).
Same Wyly and his brother were businessmen from Texas that made a majority of their money from computers, steakhouse restaurants and Michael’s arts and craft stores. They both have made billions of dollars but along with this massive income is a huge tax bill. Being the businessmen they are, they found a way to not pay taxes on some of the money they made by putting it in a trust in the Isle of Man, which is an island located in-between Ireland and the United Kingdom (Avi-Yonah). Like I had mentioned before stock options are a viable way to misrepresent income. Some of the stock options that the Wyly’s owned were transferred to this trust and their children were the main beneficiaries of this trust (Avi-Yonah). This in turn would make the money and stock options go to his children once Sam died. He would not have to count this money as revenue and would not have to pay taxes. Obviously this is illegal and in 2014 a jury found both of the Wyly brothers guilty of securities fraud and tax evasion (Avi-Yonah). These two now owe more than 2 billion dollars to the IRS, but can't pay this huge sum of money because they are now in bankruptcy. This is only one of many examples of individuals trying to avoid paying taxes. Big corporations like Apple don't use this type of loophole, but they too have found a different way to not pay taxes.
Apple is just one company of many that has found a very interesting loophole to not pay taxes to the Untied States. Essentially Apple has offices around the world, but in this instance they use the office in Ireland to claim profits. Apple makes it seem as though the office in Ireland is spending most of the money so in turn most of the profits will be sourced back to that office. You may be thinking how is this a tax loophole? By sending the profits to Ireland, Apple will only have to pay at most a 12.5% tax rate (Avi-Yonah). This is much better than paying the top tax rate of 35% in America. To make this deal sweeter Apple has even negotiated a tax deal with the Ireland government that allows them to pay about a 2% tax rate (Avi-Yonah).
Just because individuals and company’s are able to pay less tax and find loopholes doesn’t always mean all of this is legal. As defined by law “Any person who willfully attempts in any manner to evade or defeat any tax imposed or the payment thereof shall be guilty of a felony” ("Tax Evasion."). This felony they are talking about would be tax evasion. If you are an individual and are found guilty there will be a $100,000 fine and up to 5 years in jail, but if you are a corporation this fine will be increased to $500,000 per case of tax evasion ("Tax Evasion."). Also in addition to these fines you will have to pay the cost of prosecution.
As you can see there is a hefty price to pay if you are caught trying to get around the United States tax code. Like I had mentioned before, until recently the IRS has not focused on tax evasion. The IRS is just now realizing how many companies are sending money overseas to get around paying taxes, hence the crack down and aggressive tracking of funds. Based on the facts presented above it is obvious that the United States government is missing out on huge chunks of tax revenue when people send assets out of the country. Tax evasion will always be a problem in the future, because as the law evolves to close loopholes, someone will work just as hard to find another one, thus creating a never-ending cycle.
Avi-Yonah, By Reuven. "International Tax Evasion: What Can Be Done?" The American Prospect. American Prospect, 26 May 2016. Web. 04 Nov. 2016.
Saunders, Laura. "Inside Swiss Banks' Tax-Cheating Machinery." The Wall Street Journal. The Wall Street Journal, 22 Oct. 2015. Web. 3 Nov. 2016.
"Tax Evasion." LII / Legal Information Institute. Cornell University, n.d. Web. 04 Nov. 2016.