Failing to file returns in the United States

According to some estimates, about three percent of taxpayers do not file tax returns at all.Fact|date=June 2007 In the case of U.S. Federal income taxes, civil penalties for willful failure to timely file returns and willful failure to timely pay taxes are based on the amount of tax due; thus, if no tax is owed, no penalties are due. [ See usc|26|6651. ] The civil penalty for willful failure to timely file a return is generally equal to 5.0% of the amount of tax "required to be shown on the return per month, up to a maximum of 25%. [ See usc|26|6651(a)(1). ] By contrast, the civil penalty for willful failure to timely pay the tax actually "shown on the return" is generally equal to 0.5% of such tax due per month, up to a maximum of 25%. [ See usc|26|6651(a)(2). ] The two penalties are computed together in a relatively complex algorithm, and computing the actual penalties due is somewhat challenging.

In cases where a taxpayer does not have enough money to pay the entire tax bill, the IRS can work out a payment plan with taxpayers.

For years for which no return has been filed, there is no statute of limitations on civil actions -- that is, on how long the IRS can seek taxpayers and demand payment of taxes owed. [ See usc|26|6501. ]

For each year a taxpayer willfully fails to timely file an income tax return, the taxpayer can be sentenced to one year in prison. [ See usc|26|7203. ] In general, there is a six-year statute of limitations for with respect to Federal tax crimes. [ See usc|26|6531. ]

Tax shelters

Tax shelters are investments that allow, and purport to allow, a reduction in one's income tax liability. Although things such as home ownership, pension plans, and Individual Retirement Accounts (IRAs) can be broadly considered "tax shelters", insofar as funds in them are not taxed, provided that they are held within the IRA for the required amount of time, the term "tax shelter" was originally used to describe primarily certain investments made in the form of limited partnerships, some of which were deemed by the U.S. Internal Revenue Service to be abusive.

The Internal Revenue Service and the United States Department of Justice have recently teamed up to crack down on abusive tax shelters. In 2003 the Senate's Permanent Subcommittee on Investigations held hearings about tax shelters which are entitled "U.S. TAX SHELTER INDUSTRY: THE ROLE OF ACCOUNTANTS, LAWYERS, AND FINANCIAL PROFESSIONALS". Many of these tax shelters were designed and provided by accountants at the large American accounting firms.

Examples of U.S. tax shelters include: Foreign Leveraged Investment Program (FLIP) and Offshore Portfolio Investment Strategy (OPIS). Both were devised by partners at the accounting firm, KPMG. These tax shelters were also known as "basis shifts" or "defective redemptions."

Prior to 1987, passive investors in certain limited partnerships (such as oil exploration or real estate investment ventures) were allowed to use the passive losses (if any) of the partnership (i.e., losses generated by partnership operations in which the investor took no material active part) to offset the investors' income, lowering the amount of income tax that otherwise would be owed by the investor. These partnerships could be structured so that an investor in a high tax bracket could obtain a net economic benefit from partnership-generated passive losses.

In the Tax Reform Act of 1986 the U.S. Congress introduced the limitation (under usc|26|469) on the deduction of passive losses and the use of passive activity tax credits. The 1986 Act also changed the "at risk" loss rules of usc|26|465. Coupled with the hobby loss rules (usc|26|183), the changes greatly reduced tax avoidance by taxpayers engaged in activities only to generate deductible losses.

Media Representation

" [ http://www.pbs.org/wgbh/pages/frontline/shows/tax/ Tax Me if You Can ] " - PBS Frontline documentary into tax avoidance

Ee also

* Bottom of the harbour tax avoidance (Australia)
* Civil disobedience
* Gary Becker
* Loophole
* Tax patent
* Stop Tax Haven Abuse Act
* Tax exile
* Tax Farming
* Tax haven
* Corporate Inversion
* Tax incidence
* Tax protester
* Tax resistance
* Underground Economy

References

Further reading

* Taxation of Foreign Domiciliaries (James Kessler QC, 5th edition, 2005, Key Haven Publications) chapter 16 discusses tax avoidance in context of UK anti-avoidance provisions.

External links

* [ http://www.taxjustice.net Tax Justice Network ] - research into "the negative impacts of tax avoidance, tax competition and tax havens"
* [ http://aboutlawenforcement.com/tax-evasion Law Enforcement ]

 

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