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Wednesday October 1, 2014

Washington News

Washington Hotline

Tax Fraud Costs $5.2 Billion

A Government Accountability Office (GAO) report published on September 22 strongly urged IRS Commissioner John Koskinen to take bold action against tax refund fraud. There was an estimated $5.2 billion in fraud during the past year.

Several Congressional leaders responded with pointed requests to the IRS Commissioner and strongly advocated improved efforts to combat tax refund fraud.

Senate Finance Chair Ron Wyden (D-OR) noted, “This GAO report is an important step forward as it makes a number of important recommendations for verifying that taxpayers are getting the refunds they deserve and that the fraudsters don’t get them instead. I’m working closely with my colleagues here in the Congress and the IRS to fight this serious and growing problem that hurts both citizens and the integrity of our tax administration.”

The Ranking Member of the Senate Finance Committee is Orrin Hatch (R-UT). He also expressed the need for immediate action by stating, “As the GAO made clear today, there is more that can be done to improve the agency’s anti-fraud capabilities. Moving forward, I hope the IRS will take a serious look at these recommendations and work with Congress to implement smart safeguards that not only better serve the victims of identity theft refund fraud but, ultimately, stop it before it even starts.”

A center for the tax refund fraud problem has been the state of Florida. Sen. Bill Nelson (D-FL) has been very active in encouraging IRS and Department of Justice pursuit of fraudulent refunds. He stated, “This problem is not going away, unless we go hard after these criminals while also doing what we can to prevent this crime.”

House Ways and Means Chair Dave Camp (R-MI) observed that there have been obvious refund fraudsters who have not been quickly apprehended by the IRS. He noted, “In one case, the IRS received over 2,000 returns from a single address – paying out over $3.3 million in refunds. That is not just a simple error, that is clear mismanagement.”

Wyden and Hatch have introduced the Tax Refund Theft Prevention Act of 2014 (S.2736), which protects filers who have had their refund stolen. They note that while the cost of tax fraud is larger, taxpayers are also victimized by IRS impersonators.

Timothy Camus, Deputy Inspector General for Investigations at the Treasury Inspector General for Tax Administration, stated that “the volume of complaints received by TIGTA’s Complaint Hotline Center about this scam is unprecedented.” He noted that there have been 130,000 contacts with TIGTA complaining about IRS impersonators. The fraudulent impersonations resulted in individuals losing $8 million last year.

IRS Commissioner John Koskinen agreed that this is an increasing problem. He stated, “For some reason, impersonation scamming has grown this year. It has always been out there, but there is much more of it this year.”

Treasury Secretary Lew Attacks Inversions


While Walgreens decided not to invert and Burger King is proceeding on an inversion with Canadian company Tim Hortons, Inc., the Treasury Department has been under pressure to try to stop inversions. With the Burger King inversion, its tax headquarters will move to Canada. This is claimed to be primarily a business move by its leaders, but it is likely to result in lower corporate taxation.

Many directors of large public companies claim they have an obligation to their shareholders to follow a legal course of action that recognizes the U.S. corporate tax rate is the highest in the industrial world. In their view, they should take legal action to move the tax headquarters overseas in order to lower taxes.

On September 22, Treasury Secretary Jacob Lew announced new regulations that are designed to limit inversions. First, the modification of Sec. 7701(l) would restrict “hopscotch loans.” In these loans cash from a foreign corporation is loaned to the new foreign parent. The change would treat these loans as U.S. property for 10 years under our tax code.

Second, there are new regulations that would restrict transfer of cash or property from foreign corporations to the new parent with the goal of avoiding U.S. tax. The new anti-inversion regulations apply after September 22, 2014.

Lew noted that there would be continuing efforts to reduce the incentive to invert. He stated, “These first, targeted steps make substantial progress in constraining the creative techniques used to avoid U.S. taxes, both in terms of meaningfully reducing the economic benefits of inversions after the fact, and when possible, stopping them altogether.”

President Obama agreed that the efforts should continue. He stated, “In the weeks and months ahead, we should do even more to bring fairness to our tax code, help our businesses create more American jobs, and expand opportunity for all.”

House Ways and Means Chair Dave Camp (R-MI) was skeptical that the regulations would have significant impact. He stated, “We have been down this rabbit hole before, and until the White House gets serious about tax reform, we are going to keep losing good companies and jobs to countries that have or are actively reforming their tax laws.”

Antiquated U.S. Corporate Tax Code


The U.S. corporate tax code has had a federal and state top tax rate of approximately 39% for the past 28 years. The Organization for Economic Co-operation and Development (OECD) is an international agency that studies taxes and the economy for North America, Europe, Japan and other areas. During the past 50 years it has published multiple studies that discuss the tax and economic policies of these nations. It recently published the top state and federal tax rates for the United States as compared to the other industrial nations of the world.

YEAROECD RATEU.S. RATE
198644.3%38.6%
1994 37%39.1%
2004 28%39.1%
201424.8%39.1%

In 1986, the top U.S. rate was 5.7% lower than the average OECD rate. By 2014, the top U.S. rate was 14.3% higher than the OECD rate. This 20% relative change in top tax rates has resulted in a number of multinational corporations moving their tax headquarters overseas.

The Alliance for Competitive Taxation (ACT) published a release with specific corporate tax examples. The United Kingdom lowered the top corporate tax rate from 28% in 2010 to 21% in 2014. The current plan in the UK Parliament is to continue to reduce the corporate rate to 20%.

British Finance Minister George Osborne noted, “I want a sign to go up, over the British economy, that says ‘open for business’. And this is how I proposed to do it. Corporation tax rates are compared around the world, and low rates act as adverts for the countries that introduce them.”

Canada had a top rate of 42.4% in 2000. Following several reductions, the top corporate Canadian tax rate in 2014 was 26.3%.

Japan has historically had the highest rates. The 2011 rate of 39.5% was reduced to 34.6% in 2014. The government has stated additional plans to lower the rate eventually to 30%.

Mieko Nakabayashi, Member of the Japanese House of Representatives, stated, “With most of the world – Japan included – cutting corporate tax rates and employing territorial tax systems to remain competitive, the U.S. must surely know that its hesitancy to do these things is handing the advantage to its international competitors.”

Editor’s Note: The controversy over inversions is leading to a bipartisan consensus that action on the corporate tax code is now very important if the U.S. wants to increase employment. The U.S. must modernize the corporate tax code or continue to lose U.S. multinational corporations to other nations with more favorable tax policies. The major tax reform in 1986 started with a detailed plan from the Department of the Treasury. The question members of both parties in Congress are asking is whether Treasury Secretary Jack Lew will present an actual structure for corporate tax reform in January of 2015.

Applicable Federal Rate of 2.2% for October -- Rev. Rul. 2014-26: 2014-41 IRB 1 (19 Sep 2014)


The IRS has announced the Applicable Federal Rate (AFR) for October of 2014. The AFR under Section 7520 for the month of October will be 2.2%. The rates for September of 2.2% or August of 2.2% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2014, pooled income funds in existence less than three tax years must use a 1.4% deemed rate of return. Federal rates are available by clicking here.

Published September 26, 2014
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Previous Articles

Congress Votes and Departs to Campaign

House and Senate Tax Extender Meetings

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Koskinen Warns of IRS Problems

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