(See CTJ director's full explanation of Facebook's use of the stock option deduction here.)

Facebook, Inc.’s upcoming initial public stock offering (IPO) paperwork reveals that it plans to wipe out all of the company’s federal and state income tax obligations for 2012 and actually generate a half billion dollar tax refund. As part of the plan, Facebook co-founder and controlling stockholder, Mark Zuckerberg can expect a $2.8 billion after tax cash windfall.

According to Facebook’s SEC filing, the company has issued stock options to favored employees, including Zuckerberg, that will allow them to purchase 187 million Facebook shares for little or nothing in 2012. Options for 120 million shares (worth $4.8 billion) are owned by Zuckerberg. The company indicates that it expects all of the 187 million in stock options to be exercised in 2012.

The tax law says that if a corporation issues options for employees to buy the company’s stock in the future for its price when the option issued, then if the stock has gone up in value when employees exercise the options, the company gets to deduct the difference between what the employee bought it for and its market price.

When, as Facebook expects, the 187 million stock options are cashed in this year, Facebook will get $7.5 billion in tax deductions (which will reduce the company’s federal and state taxes by $3 billion). According to Facebook, these tax deductions should exceed the company’s U.S. taxable 2012 income and result in a net operating loss (NOL) that can then be carried back to the preceding two years to offset its past taxes, resulting in a refund of up to $500 million.

Senator Carl Levin, who has proposed to limit the stock option loophole, told the New York Times, “Facebook may not pay any corporate income taxes on its profits for a generation. When profitable corporations can use the stock option tax deduction to pay zero corporate income taxes for years on end, average taxpayers are forced to pick up the tax burden. It isn’t right, and we can’t afford it.”

To be sure, Zuckerberg will have to pay federal and state income taxes (at ordinary tax rates) when he exercises his $4.8 billion worth of stock options in 2012. That’s only fair, since that $4.8 billion obviously represents income to him. But even after paying taxes, he’ll still end up with $2.8 billion.

The problem isn’t Zuckerberg’s personal taxes but Facebook’s. Why should companies get a tax deduction for something that cost them nothing?  If an airline allows its workers to fly free or at a discounted price on flights that aren’t full (for vacations, etc.) airlines don’t get a tax deduction (beyond actual cost) for that, even though the workers get taxed on the benefit, because it costs the airline nothing.

In the case of stock options, there is also a zero cost to the employer. So it’s more reasonable to conclude that while employees should be taxed on stock option benefits (“all income from whatever source derived” as the tax code states), employers should only be able to deduct their cost of providing those benefits, which, in the case of Facebook and Zuckerberg, is zero.

The bottom line is that there’s something obviously wrong with a tax loophole that lets highly profitable companies like Facebook make more money after tax than before tax. What’s about to happen at Facebook is a perfect illustration of why non-cash “expenses” for stock options should not be tax deductible.

See page 12 of our Corporate Taxpayers and Corporate Tax Dodgers report for more about the 185 other companies we found exploiting the stock option loophole.

Photo of Facebook Logo via Dull Hunk and photo Mark Zuckerberg via KK+ Creative Commons Attribution License 2.0

A new report from President Obama’s jobs council reflects a major dispute between corporate and labor leaders over tax reform. According to Reuters, the report “notes disagreement among council members over whether to shift to a ‘territorial’ system that exempts most or all foreign income from corporate taxes when it is repatriated.”

The report is from the President’s Council on Jobs and Competitiveness, which includes labor and business leaders and is chaired by Jeffrey Immelt, CEO of the notorious tax dodger, General Electric.

A “territorial” tax system is a euphemism for exempting the offshore profits of U.S. corporations from our corporate income tax. The bottom line is that our current system already provides a tax break that encourages U.S. corporations to shift investments offshore, and a “territorial” system would expand that tax break.

The existing tax break is the rule that allows U.S. corporations to “defer” U.S. taxes on their offshore profits until those profits are brought to the U.S. (until they are “repatriated”). Often these profits remain offshore for years and the U.S. corporation may have no plans to repatriate them ever.

This “deferral” of U.S. taxes on offshore profits provides an incentive for U.S. corporations to shift operations and jobs to a lower tax country, or just use accounting gimmicks to make their U.S. profits appear to be “foreign” profits generated in offshore tax havens.

These incentives for corporations to shift jobs and profits offshore would only increase if their offshore profits were entirely exempt from U.S. taxes, as would be the case under a territorial tax system.

Labor leaders know this, and labor unions have joined other organizations in opposing a territorial system. In October, when there were rumors that the Congressional “Super Committee” might propose a corporate tax reform, the big unions joined a letter to the committee members urging them to reject any proposal for a territorial tax system.

Corporate leaders, on the other hand, have been calling for a territorial system because of the benefits it would provide for corporations trying to lower their tax bills. The likely “disagreement” cited in the White House report probably was between the labor leaders and corporate leaders on the President’s jobs council.

As we explain in this fact sheet, the real answer is not to adopt a territorial tax system but to end “deferral.” Here’s a report making the same case in much more detail.

Ending Tax Breaks for Companies Moving Jobs Offshore

President Obama hosted an “Insourcing American Jobs Forum” last week with business leaders who are bringing jobs back to the United States. During the event, the President announced he’d soon “put forward new tax proposals that reward companies that choose to bring jobs home and invest in America.  And we’re going to eliminate tax breaks for companies that are moving jobs overseas.”

As already explained, the most straightforward way to do this would be to end deferral.

Another possibility is that the President could push some of the modest, but still helpful, proposals made early in his administration to limit the worst abuses of deferral. (Here’s a CTJ report explaining these proposals.) Unfortunately, the President immediately started backing away from these and dropped the most significant of these reforms (a change to the arcane-sounding “check-the-box” rules) by the time he made his second budget proposal.

Real tax reform depends on the administration being far more willing to stand up to the corporate CEOs — including those who sit on his jobs council.

Photo of Council on Jobs and Competitiveness via The White House Creative Commons Attribution License 2.0

A new report from the IRS estimates that individuals and businesses failed to pay $385 billion of the taxes they owed in a single year — a figure that many experts believe is an understatement. This comes just months after Congress cut funding for IRS enforcement activities that could recoup those dollars.

The IRS report estimates that taxpayers paid $450 billion less than was owed in 2006 and that the IRS eventually recovered $65 billion of that, leaving a net "tax gap" of $385 billion — which is roughly 14.5 percent of all taxes due.

As CTJ director Bob McIntyre explained in his testimony before the Senate Budget Committee a few years ago, he and other tax experts have long thought that the tax gap is actually larger than what the IRS estimates, particularly the portion that results from income hidden in offshore tax havens.

The IRS is less able to counter this type of tax evasion than it was in the past. Congress drastically slashed the IRS budget in the 1990s with the rationale that the agency was a bother to taxpayers. But another report released today by the National Taxpayer Advocate (a Bush appointee) concludes that the paltry budget for the IRS is itself the source of irritation for taxpayers who are affected by the various short-cuts the IRS must take in administering the tax system with fewer staff.

The more fundamental problem with the tax gap is that it means the vast majority of Americans, who pay the taxes they owe, are effectively subsidizing those who do not.

Most middle-income working people don't have many opportunities to evade taxes because their employers report their wages to the IRS and withhold a portion of them for taxes. On the other hand, corporations and business owners are responsible for a majority of the tax gap.

For example, underreporting of business income, corporate income, and compensation by self-employed individuals together make up a majority of the tax gap, according to the IRS report.

Congress's cuts to IRS funding are bizarre because this is one type of government spending that pays for itself several times over. In some cases a dollar of additional IRS funding can generate $200 of revenue. In other words, lawmakers have forced cuts to the IRS budget knowing full well that this is one type of spending cut that actually increases the budget deficit.

In addition to restoring IRS funding, there are other measures that Congress can take to increase income reporting and crack down on institutions that facilitate offshore tax evasion, as McIntyre called for in his testimony. Most of those proposals have still not been enacted, partly because they're opposed by the Tax Cheaters Lobby.

Photo of Tax Preparation via Money Blog Creative Commons Attribution License 2.0

On Thursday, a subcommittee hearing on a proposed IRS rule veered towards the absurd when Citizens for Tax Justice and the Obama administration were accused of supporting dictators, kidnappers and terrorists.

CTJ’s Rebecca Wilkins testified before a House Financial Services subcommittee in favor of a proposed rule that would require U.S. banks to report to the IRS any interest payments made to foreign account holders in the same way they report interest payments made to U.S. resident account holders.

Read Rebecca Wilkins’s Written Testimony

Watch Rebecca Wilkins’s Testimony

The U.S. government taxes interest payments made to U.S. residents but not those made to foreigners, so it never bothered to require banks to report those made to foreigners. But the IRS has proposed to change that rule in order to reduce tax evasion by Americans directly (to help identify Americans who evade U.S. taxes by posing as foreigners) and indirectly (by helping other countries enforce their tax laws so that they’ll help us enforce ours).

Wilkins faced off against three witnesses opposed to the proposed rule and a panel of lawmakers controlled by bank supporters. Chairman Spencer Bachus read a letter from the Florida delegation, which apparently is protective of its banks even when they facilitate tax evasion. Many people who live in unstable countries and have U.S. bank accounts, the letter argues, are “concerned their personal bank account information could be leaked to unauthorized persons in their home country government or to criminal or terrorist groups upon receipt from U.S. authorities, which could result in kidnapping or other terrorist actions…”

In other words, Bachus and the Florida delegation believe we should help all foreign individuals break their home countries’ tax laws because some of those countries have corrupt governments.

Never mind that the IRS would only hand over information to foreign governments in response to a careful, limited request under a tax information exchange agreement, as Wilkins calmly explained. Even more important, Wilkins explained, is that the rule in effect now actually helps criminals, corrupt government officials, terrorists and money launderers by allowing them to hide their money in the U.S.!

“America should not be a tax haven,” Wilkins told the panel.

Towards the end of her opening statement, Wilkins addressed her opponents directly:

"Chairman Bachus said, ‘Do we want to have blood on our hands, as a result of these rules?’ I want to tell you, the U.S. already has blood on its hands. For every dollar of tax revenue that is taken out of the governments of developing countries, it impairs the ability of those countries to provide health and safety measures, to feed its citizens, to provide sanitation, to provide health care, to provide military and police that are not corrupt. Every time we facilitate a dollar coming out of those economies, we have blood on our hands."

Perhaps the most remarkable comment came at the end of the hearing from Bill Posey of Florida, who said to Wilkins, “Your advocacy for the government of Venezuela and, um, ultimately someday maybe Iran, North Korea and Cuba and the like, startles me, quite frankly. Most of us here try to put America first.” Posey then went on, not about putting Americans first, but about the plight of the people living under these dictatorships who hide their money in American banks. 

Wilkins had already explained that the IRS would not be required to provide foreign governments with the information it collects, but would be able to respond to a limited request under a tax information exchange agreement. Perhaps if Wilkins had been allowed to respond to Posey’s comments, she might have addressed some of his confusion, starting with his apparent belief that the United States has tax information exchange agreements with North Korea, Iran and Cuba.

Labor unions, small business associations and good government groups have lined up to oppose proposals to exempt corporations' offshore profits from U.S. taxes on a permanent basis (by enacting a "territorial" tax system) or temporary basis (by enacting a "repatriation" amnesty). These organizations also oppose any overhaul of the corporate income tax that fails to raise significant revenue.

The organizations spell out their positions on corporate tax reform in a letter sent to members of the Joint Select Committee on Deficit Reduction (commonly called the "Super Committee") today.

Read the letter.

These positions put the organizations at odds with House Ways and Means Chairman Dave Camp, who today proposed a corporate tax overhaul that includes a territorial system and that would be "revenue-neutral."

The letter asks the Super Committee to do four things:


1. Reject any proposal to exempt U.S. corporations’ offshore profits from U.S. taxes permanently (by enacting a “territorial” tax system).

2. Reject any proposal to exempt U.S. corporations’ offshore profits from U.S. taxes temporarily (by enacting a “repatriation” amnesty).

3. Require any overhaul of the corporate income tax to raise significant revenue.

4. Require that the revenue-positive result be estimated using traditional revenue scoring procedures as opposed to controversial alternative procedures (often called “dynamic” scoring).

To learn more, see CTJ's fact sheet about raising revenue through corporate tax reform and CTJ's fact sheet about territorial/repatriation proposals.

Photo of Rep. Dave Camp via Michael Jolley Creative Commons Attribution License 2.0

New CTJ Fact Sheet Explains Why Congress Should Reject “Territorial” System

House Ways and Means Chairman Dave Camp is planning to release a “working draft” of a plan to adopt a “territorial” tax system, which is another way of saying a permanent tax exemption for corporations’ offshore profits.

On Tuesday, BNA’s Daily Tax Report (subscription required) informed us that

Lobbyists representing U.S. multinationals said they have not heard anything specific related to the timing of the proposal but they have heard that it will not be formal legislation, just a working draft. The idea behind this is that it would allow business interests to weigh in on a proposal before lawmakers turned it into actual legislation, multiple lobbyists said.

That’s about the closest thing we ever see to an admission that corporate lobbyists will decide what the Republican-controlled House tax-writing committee should enact.

Those lobbyists will be in an awfully good mood from the start because the “territorial” tax system that Chairman Camp is offering them will increase opportunities for their companies to lower their taxes by shifting jobs and profits offshore. To understand why, see CTJ’s new fact sheet on the international corporate tax rules.

Photo of Rep. Dave Camp via Michael Jolley Creative Commons Attribution License 2.0

CTJ, Heritage Foundation, Tax Foundation and Others AGREE that the 60 Former Hill Staffers Lobbying for Repatriation Amnesty Are Wrong

Bloomberg reports that the corporate coalition promoting a tax amnesty for offshore profits that U.S. corporations repatriate to the U.S. has hired 160 lobbyists, including an astounding 60 people who formerly served as staff to current members of Congress.

This breathtaking chart illustrates how everyone from President Obama’s former communications director to the Democratic Finance Committee chairman’s former chief of staff is now being paid by corporations to promote the repatriation amnesty.

Even more remarkable is that the organizations that study tax policy and agree on nothing have come to a consensus that this proposal should be rejected. Groups like Citizens for Tax Justice and the Center on Budget and Policy Priorities have been joined by the anti-tax Tax Foundation and the extremely conservative Heritage Foundation in opposing the proposal.

Naturally, the consensus ends there. For example, CTJ explains that the way to really fix our international tax rules is to remove the tax break that causes U.S. corporations to shift profits and operations overseas in the first place (“deferral”) while the Tax Foundation argues instead for permanently exempting offshore corporate profits from U.S. taxes. “However,” the Tax Foundation explains, “experience shows that the [repatriation] holiday has been ineffective policy.”  

The Heritage Foundation is similarly unimpressed with the proposal, saying:

“The issue here is not whether tax cuts are good or bad per se, but whether this particular tax cut would increase domestic employment and domestic jobs. Again, the answer is that it would not. . . Are these repatriating companies capital-constrained today? No, they are not. These large multinational companies have enormous sums of accumulated earnings parked in the financial markets already.”

Other organizations that have published analyses extremely critical of the proposal include the Economic Policy Institute, the Tax Policy Center, the Center on Budget and Policy Priorities, and the Center for Economic and Policy Research.

The proposed repatriation amnesty, which proponents call a “repatriation holiday,” would temporarily remove all or almost all U.S. taxes on the profits that U.S. corporations bring back to the U.S. from other countries, including profits that they shifted to offshore tax havens using accounting gimmicks and transactions that only exist on paper.

Here’s what we have said about this debate:

Data on Top 20 Corporations Using Repatriation Amnesty Calls into Question Claims of New Democrat Network

“The twenty companies that repatriated the most offshore profits under the temporary repatriation amnesty enacted by Congress in 2004 now have almost triple the amount of profits ‘permanently reinvested’ (i.e., parked) overseas as they did at the end of 2005.”

Call on Congress to Oppose the Amnesty for Corporate Tax Dodgers

1. Another repatriation amnesty will cost the U.S. $79 billion in tax revenue according to the non-partisan Joint Committee on Taxation.

2. Another repatriation amnesty will cost the U.S. jobs because it will encourage corporations to shift even more investment offshore.

3. The proposal is an amnesty for corporate tax dodgers because those corporations that shift profits into tax havens benefit the most from it.

4. Congress enacted a repatriation amnesty in 2004, and the benefits went to dividend payments for corporate shareholders rather than job creation, according to the non-partisan Congressional Research Service. Many of the corporations that benefited actually reduced their U.S. workforce.

Here’s more from CTJ on the right way to fix our international tax rules:
Congress Should End “Deferral” Rather than Adopt a “Territorial” Tax System

The twenty companies that repatriated the most offshore profits under the temporary repatriation amnesty enacted by Congress in 2004 now have almost triple the amount of profits “permanently reinvested” (i.e., parked) overseas as they did at the end of 2005. The figures call into question a recent report from the New Democrat Network (NDN) supporting a second repatriation amnesty.

Read the report

On Sunday, 45,000 Verizon employees went on strike to protest the company’s push for employees to give back $1 billion in health, pension, and other contract concessions. What makes these demands particularly galling is that Verizon is both highly profitable and already a model of poor corporate citizenship.

Despite earning over $32.5 billion over the last 3 years, Verizon not only paid nothing in corporate income taxes, it actually received nearly $1 billion (the same amount as the concessions they are seeking) in tax benefits from the federal government during that time.

If Verizon thinks its employees should pay $1 billion more for their benefits, we think Verizon should pay A LOT more for the benefits it receives from the federal government.

In fact, if Verizon paid its corporate income tax at the official rate of 35 percent, it would have owed more than $11 billion (rather than negative $1 billion). This alone is enough to  avoid the recent cuts in the debt deal to student loan programs..

For its part, Verizon has disputed the claim that it does not pay enough in taxes. Their math however is misleading because it includes taxes that they will owe in the future, not those they actually pay in a given year.

Verizon’s tax dodging is now so infamous that it has become one of the primary targets of US Uncut, a grassroots organization dedicated to getting corporations to pay their fair share.

The Communication Workers of America (CWA), who is leading the strike along with the International Brotherhood of Electrical Workers (IBEW), also notes that while calling for a benefit cut from workers, the top 5 executives at Verizon received more than a quarter of a billion dollars in compensation over the last 4 years.

Given their record on taxes and compensation, it’s hard to believe Verizon will come around to being a good corporate citizen anytime soon, yet unions and the public alike need to keep up the pressure by asking Verizon: Can you hear us now?

A bipartisan group of lawmakers in Congress proposes to help companies that engage in “life sciences” research by combining two terrible tax policies — the research and experimentation (R&E) credit and a tax holiday for repatriated offshore profits — into one monstrosity.

The bill, which has been introduced by Senator Robert Casey (D-PA) in the Senate and Devin Nunes (R-CA) in the House, gives the pharmaceutical and biotech companies, and some companies that make medical devices, two options. They could take a special 40 percent R&E credit (which would be double the value of the existing R&E credit) for up to $150 million in research expenses.

Alternatively, they could repatriate up to $150 million in offshore profits, which would be taxed at just 5.25 percent instead of the normal 35 percent that applies to corporate profits. This would particularly benefit pharmaceutical companies and others who are notorious for using intellectual properties to shift profits to offshore tax havens. The bill would allegedly require the repatriated offshore profits to be used for the research.

A coalition of companies that would benefit is promoting the bill.

Neither of the tax breaks offered under the bill would create jobs.

The R&E Credit Rewards Companies for Research They Would Do Anyway

The R&E credit, introduced during the Reagan administration, has been the subject of many tax scandals as companies have tried, often successfully, to treat activities that are obviously not scientific research — such as developing hamburger recipes or accounting software — as qualified R&E.

The R&E credit has a curious following among politicians who normally style themselves as free-market advocates, but who nevertheless maintain that big business needs to be subsidized to do research. In fact, a 2009 report from the Government Accountability Office found that “a substantial portion of credit dollars is a windfall for taxpayers, earned for spending they would have done anyway, instead of being used to support potentially beneficial new research.”

The Repatriation Holiday that Will Actually Reduce Jobs in the U.S.

A separate coalition of companies has been promoting a repatriation holiday for months, but has lost steam in the face of estimates that their proposal would cost $79 billion, partly because companies would respond by shifting even more of their jobs and profits offshore. Congress tried this type of measure in 2004, and the Congressional Research Service found the benefits went to corporate shareholders and not towards job creation.

The new proposal is different in that it would target the repatriation holiday at companies that engage in “life sciences” research, and couple it with an increased R&E credit. But none of this makes the repatriation holiday any less ill-advised.

The requirement that repatriated funds must be put towards life sciences research simply won’t work because money is fungible. A company can put the money towards research it would have done anyway, which would free up other money to pay larger bonuses or for any other purpose. In fact, Martin Regalia, a senior vice president for the U.S. Chamber of Commerce, said at a panel discussion on March 25 that because money is fungible, you cannot really direct a company to do any particular thing with cash it receives.

It’s Not Enough for Lawmakers to Say They’re Doing “Something” to Create Jobs

Some members of Congress are desperate to appear to be creating jobs while knowing full well that Tea Party-backed lawmakers will block the sort of spending programs that actually can create jobs. Some of them have settled on this proposal, hoping that it includes a large enough tax giveaway to win over the “life sciences” companies (and their lobbyists and campaign contributions).

For these companies, each batch of grim unemployment data must seem like an opportunity. They are increasingly able to request tax breaks in the name of “job creation” that will never happen.

Photo via Wellstone.Action Creative Commons Attribution License 2.0

Levin-Grassley Incorporation Transparency Bill Would Help Identify Mysterious $1 Million Contribution to Romney Campaign

Today, NBC News reports that a Delaware company made a $1 million contribution to a PAC supporting Mitt Romney about six weeks after it was formed, and then dissolved two months later. This ripped-from-the-headlines story of a corporation that was created for the sole purpose of laundering massive political contributions highlights the need for a bill that was just introduced this week in the U.S. Senate.

The company, called W Spann LLC, filed a certificate of formation on March 15 with no information about the owners or the business purpose of the entity. On April 28, the LLC made a $1 million contribution to a political action committee supporting Mitt Romney.

The company then dissolved on July 11, leaving no trail of the real people behind the political mega-donation. Lawrence Noble, former general counsel of the Federal Election Commission, called it a "roadmap for how people can hide their identities" and disguise their political contributions.

This technique would be blocked if Congress enacts a bipartisan bill introduced this week to require states to collect information about who really controls corporations and limited liability companies (LLCs) that are formed in their jurisdictions. Senators Carl Levin (D-MI) and Chuck Grassley (R-IA) introduced the Incorporation Transparency and Law Enforcement Assistance Act (S. 1483) on August 2.

The bill's provisions are vital to law enforcement who are trying to investigate crimes ranging from arms dealing to money laundering and tax evasion. But it will also help combat another problem - the clandestine funding of politics.

Last year, a Senator from a certain state known for its loose incorporation laws blocked this bill from moving forward. (See Criminals, Inc.: Delaware's Fight to Keep Opaque Incorporation Rules is Helping Tax Cheats and Terrorists, June 25, 2010.)

The reasons for supporting this law continue to multiply. Lawmakers on both sides of the aisle should be lining up to cosponsor the Incorporation Transparency Act.

Photo via Gage Skidmore Creative Commons Attribution License 2.0

On July 27, Congressman Lloyd Doggett (D-TX) introduced the Stop Tax Haven Abuse Act (H.R. 2669) in the House of Representatives with 53 cosponsors. The Senate version was introduced July 12 by Sen. Carl Levin.

The U.S. Treasury loses an estimated $100 Billion in tax revenues annually due to tax havens. Many believe the actual revenue loss could be much higher.

A key provision would tax corporations where they are located and do business instead of where they are incorporated, say, a post office box in the Cayman Islands. Another important provision would require companies that file with the SEC to report certain financial information on a country-by-country basis so that investors and tax authorities could see where operations are located and where profits are ending up.

Most of the Stop Act provisions are aimed at the foreign financial institutions and foreign jurisdictions that facilitate offshore tax evasion and avoidance. The bill also targets some other types of tax dodging, as well as the bankers, lawyers, and accountants who facilitate these abuses by their clients.

A new report by CTJ explains the bill's provisions.

Congress, the Internal Revenue Service, and the Department of Justice continue the attack against tax dodging, including schemes using offshore tax havens.

Congress

In Congress, Senator Carl Levin (D-MI) has introduced the Stop Tax Haven Abuse Act, which would strengthen the disclosure rules for foreign accounts and impose harsh penalties on taxpayers and tax shelter promoters who facilitate tax evasion.

Also in Congress, Sen. Charles Grassley (R-IA) has offered an amendment that would crack down on the use of offshore tax havens by charities. In a hearing last year, Senators learned that the Boys and Girls Club of America was holding more than $50 million in offshore investments in order to avoid paying the tax that is usually imposed when charities engage in business activities that are not related to their mission.

Justice Department and IRS

Meanwhile, Zurich-based Credit Suise confirmed that the U.S. Department of Justice was investigating its role in helping U.S. clients evade their tax obligation. The bank is the target of a criminal investigation prompted in part by information supplied to the Internal Revenue Service in its offshore account voluntary disclosure program.

Today, a Manhattan federal court unsealed an indictment charging a Swiss financial adviser with helping U.S. customers hide $184 million in assets from the IRS. The Swiss banking giant UBS is one of the banks where the adviser helped his clients hide their accounts.

In Virginia, a federal judge permanently barred HedgeLender LLC from promoting a tax shelter scheme called the HedgeLoan transaction. The Justice Department's Tax Division challenged the deals where clients purportedly pledged their appreciated stock for a "loan" to realize the cash without paying capital gains taxes.

In other tax dodging news, a U.S. Magistrate handed down a 28-month sentence to Rapper Ja Rule for failing to pay $1.1 million in taxes on the more than $3 million he earned in 2004-2006.

Small Business Owners

Some small business owners are also taking aim at tax dodging and tax havens. A recent op-ed from Business for Shared Prosperity argues that the opportunities that large corporations have for tax avoidance puts small businesses at an unfair disadvantage. It also points out that some of the most egregious corporate tax dodgers are those benefiting the most from public services and public investments that the rest of us pay for.

Photo via Mzrr1970 Creative Commons Attribution License 2.0

On Tuesday, Senator Carl Levin (D-MI) introduced the Stop Tax Haven Abuse Act (S. 1346) to help stem the tide of the estimated $100 billion annual tax revenue loss connected to the use of offshore tax havens. In his press conference and floor statement Sen. Levin stated that offshore tax abuses undermine public confidence in the tax system, increase the tax burden on middle America, create and unfair disadvantage for small business, and encourage the movement of jobs offshore.

The bill would give the IRS new enforcement tools to detect and prosecute these abuses. The bill is being championed by a wide spectrum of supporters including small business and the Financial Accountabiltiy and Corporate Transparency (FACT) Coalition.

Company Accused of Dodging $2 Billion in US Taxes After Calling for Exemption for Tax Haven Profits and Attacking Illinois Tax Hike

A former global tax strategy manager of Caterpillar is suing the company for demoting him after he complained that it was using “tax and financial statement fraud” to avoid $2 billion in U.S. taxes.

Daniel J. Schlicksup’s specific claim is that the company improperly attributed at least $5.6 billion of profits from the sale of spare parts from a plant in Illinois to another unit in Geneva. He alleges that after telling his superiors that he believed the tax avoidance was illegal, they retaliated by transferring him to the company’s information technology division, which is entirely out of his area of expertise.

For their part, Caterpillar representatives have said that the company complies with all laws and regulations, but have not as of yet addressed the specific charges in the lawsuit.

Based on the details released so far, it is unclear how this case against Caterpillar will ultimately pan out. The problem, according to Harvard Professor Stephen Shay, is that a company does not need “much substance” to be considered legal in these circumstances under U.S. law. In other words, even if Caterpillar is using a Swiss subsidiary primarily to avoid billions in taxes, it’s possible that the maneuver could actually be legal depending on the specific details of the subsidiary’s operation.

Caterpillar has long been an especially outspoken critic of corporate income taxes. In May, the company’s CEO called for the US to adopt a territorial tax system, which would be a boon to multinational corporations and a disaster for everyone else.

On the state level, Caterpillar was the first company to protest the recent corporate tax increases in Illinois, where the company is headquartered. They led the opposition to the state increase, despite the fact that their total (all states including Illinois) state and local tax liability represented only a tiny fraction of their costs; a mere 0.7 percent of their global earnings in 2010. In addition, if the accusations prove to have any truth, Caterpillar may have been fraudulently avoiding Illinois taxes as well.

Photo via Cyrillicus Creative Commons Attribution License 2.0