How Effective is the IRS Voluntary Disclosure Initiative of Offshore Accounts?

     Today, the IRS has issued a press release informing taxpayers that the deadline for the second special Voluntary Disclosure Initiative of Offshore Accounts has been extended from August 31, 2011 to September 9, 2011, due to the presence of Hurricane Irene on the east coast. According to the IRS, those who come forward voluntarily will get a better deal than those who wait for the IRS to find their undisclosed accounts and income. This initiative requires that individuals report any funds being held in foreign accounts. The 2011 initiative, proposes a new penalty framework that requires individuals to pay a penalty of 25 percent of the amount in their foreign bank accounts in the year with the highest aggregate account balance from 2003 to 2010. Some taxpayers will be eligible for 5 or 12.5 percent penalties in certain narrow circumstances. Individuals will also be required to pay back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties. Lastly, all original and amended tax returns must be filed by the deadline. There are several pressing questions that come to mind: (1) Is it even legal for the US Government to tax individuals on income held offshore, (2) What about income earned offshore that is held offshore, and (3) Who would consider coming forward only to be taxed and penalized?

Is This Initiative Legal?

    Article I, Section 8, Clause 1 of the US Constitution gives Congress the power to Tax and it certainly has exercised that power. According to IRS Publication 525, "if you are a US citizen or resident alien, you must report income from sources outside the US on your tax return unless it has been deemed exempt under US law. This is true whether you reside inside or outside the US and whether or not you receive a Form W-2, Wage and Tax Statement, or 1099 from the foreign taxpayer. This applies to earned income as well as unearned income such as dividends, capital gains, pensions, rents, and royalties.

What About Income Earned Offshore and held Offshore?

     Publication 54 holds that "If you are a US citizen or resident alien, your WORLDWIDE income generally is subject to US income tax, regardless of where you are living." However, taxpayers may be able to exclude $91,500 of their income as not taxable by the US, deduct part of their housing expenses from their income, or treat a limited amount of income used for housing expenses as not taxable under the Foreign Earned Income Exclusion and the Housing Deduction and Exclusion. However, they must meet the specified qualifications. So evidently, the US gave itself the right to tax US citizens and resident aliens no matter where they may reside or work.

Who Would Consider Coming Forward?

     With the additional taxes and penalties involved in this initiative, who would consider coming forward to report themselves? The number of individuals who came forward could not have been that great because the IRS has issued an award to whistle blowers who report these individuals. It would be interesting to see how many of the individuals that actually came forward did so voluntarily versus those who came forward after a close friend or relative (back stabber if you will), informed them that they have reported them to the IRS in exchange for a bounty. There is a popular maxim that individuals will continue to do what the law allows them to get away with, and will not stop until they are caught. So if this is true, I think it is safe to assume that the US needs to make the reward a percentage of the individual's foreign wealth for more whistle blowers to appear. They may find that if high enough, individuals my anonymously report themselves in order to collect a bounty on themselves. Maybe this should be added to the initiative to add a favorable incentive to turning yourself in. If I had money abroad, I would enjoy the freedom of not having my money taxed and this initiative provides no incentive for me to report myself. Maybe if I had a conscience, I would. But then again, my conscience would say "do you really want to pay taxes on money you probably already paid taxes on before you transferred it offshore? And why would you want to pay taxes now, when the US does not know about your money unless you tell them?" I think my conscience would say that I need more of an incentive, and this initiative does not offer one.

Reference

http://www.irs.gov/newsroom/article/0,,id=235695,00.html

IS THE WOMAN'S DISAPPEARANCE IN ARUBA AN INSURANCE SCAM OR MURDER?

     It is alleged that Ms. Robyn Gardner's disappearance is due to an attempt by Mr. Gary Giordano to collect on an accidental life insurance policy worth approximately $1.5 million. He is now being held in Aruba as a suspect of Ms. Robyn Gardner's disappearance, although no body has been found. Do you believe that this is a case of murder or insurance fraud?
     There are several interesting allegations that suggests that the two individuals planned this disappearance prior to the trip. First, it is alleged that the two individuals met on a dating site, and decided to take this trip to Aruba after dating for a very short period of time. Next, it is also alleged that prior to going on the trip, Mr. Giordano took out this policy which was authorized by Ms. Gardner. Now who would authorize that someone take out a policy on their life worth $1.5 million without a fear that they would be killed on that trip? This sounds like a plan to fake a murder, or disappearance if you will, so that the two may become rich and live happily ever after as millionaires. Finally, the two arrived safely in Aruba, and some time later, Ms. Gardner disappears, and there is no trace of her body. Does these allegations suggest murder or do they lean more towards insurance fraud?
     I strongly believe that the two planned this disappearance so that they could collect the insurance money. After all, it requires the death to be accidental, and what better way to prove an accidental death, than to fly to an island which is outside of the United States jurisdiction, and have the female disappear as many cases exist where individuals vacation on an island and never return to the United States. I can imagine Mr. Giordano pretending to cry his eyes out, make up a story about himself and Ms. Gardner swimming in the beautiful waters of Aruba, and suddenly, a shark similar to Jazz came along, and devoured her entire body, leaving nothing, not even a drop of blood, and so they will never find her body. Meanwhile, Ms. Gardner had already left the island on a boat, and sailed to Columbia, or even Venezuela where she waits patiently for Mr. Gardner to return with the cash.
     The details of this incident really leads me to conclude that Ms. Gardner is not dead, and she will likely not be found unless the Aruba officials search the surrounding shores. It is alleged that the dating site where the two met was "Match.com." If this is the case, they certainly know how to put couples together. The interesting is that of the many Americans who vacation on islands and fail to return to the United States, but were never considered newsworthy, what makes these two individuals worth air time?

Will We Have an NBA Season This Year?

The National Basketball Association (NBA) is facing the possibility that there may not be a basketball season for 2011 as the current lockout is still in place. The lockout began on July 1, 2011 after failing to come to a resolution on the collective bargaining agreement (ESPN, 2011). Team owners are now prohibiting players from accessing the team facilities and trainers (ESPN, 2011). The issues presented for discussion are: (1) Splitting the revenue amongst teams; (2) Obtaining a Competitive Balance; (3) Setting a hard cap versus a soft cap; (4) Increasing revenue sharing for team owners; and (5) New contract terms(ESPN, 2011). The views of the NBA players in comparison to the team owners and the NBA officials are on different ends of the spectrum, and may cause millions of basketball fans disappointment if the NBA season fails to resume this year. The NBA has recently filed an antitrust lawsuit against the players for unfair bargaining (ESPN, 2011). This entire dispute could be resolved if the unions were dissolved, and owners were left in total control of their teams.

Splitting the Revenue Amongst teams

It has been suggested that teams should share the revenue when they play against each other. So there will be a certain percentage of the revenue retained by the home team and a percentage shared with the visiting team. Although on the surface it appears to be a fair proposal, there are other variables not accounted for. Should the NBA allow the least dominant teams (less successful) to benefit from the hard work placed into advertising, promotions, and the commitment to building a successful organization by the most dominant teams? For example, should the Los Angeles Lakers be forced to share its revenue with the Sacramento Kings when the Kings come to play in a sold out Staples Center? And should the Lakers share in the revenue when they play in the Pavilion (formerly known as Arco Arena)? Clearly one team would benefit more than the other from this arrangement. While the Kings would clearly benefit from sharing revenue with the Lakers, the Lakers would not stand to gain the same from sharing its revenue with the Kings. In this example, the Lakers would likely incur a larger profit by keeping the revenue made at home, rather than sharing with the Kings, while the Kings may very well profit more by receiving a share of the revenue that the Lakers made on their home court. This would be unfair to the more successful NBA teams.

Obtaining a Competitive Balance

It has been suggested that in order to obtain a competitive advantage, it is necessary to enter into a new collective bargaining agreement that would reduce the maximum salary paid to NBA players to an amount that would allow the less successful teams to have the ability to compete for superstar athletes. No matter what figure is agreed upon, it will always be to the benefit of some and to the disadvantage of others. A competitive balance can be reached without manipulation of player salaries. The most successful teams are able to attract superstar athletes not simply because they can offer a higher salary, but because they can offer a championship team. The least successful teams may argue that they are not able to compete for superstar athletes because they cannot pay their salary while trying to also surround that player with teammates who are of championship caliber. Although this would be a plausible argument, if the salary cap was lowered so that the least successful teams may compete for superstar athletes, does that not strengthen the bargaining power of the most successful teams? This would allow the most successful teams to have more money to attract an entire team of superstars. And the growing trend is that superstars are willing to incur pay cuts to play with other superstars because the chances of winning a championship is greater. The Dallas Mavericks is a perfect example of this. A salary cap will only increase the ability of the most successful teams to attract an entire squad of superstars. This would lead the NBA to setting a cap on the amount of superstars one team may have, resulting in extremely unhappy team owners, unhappy NBA players, and unhappy fans.

Hard Cap Versus Soft Cap

The owners of NBA teams proposed that the total salary paid should not exceed a certain amount to be agreed upon, and any team who exceeds the cap should pay a penalty for doing so. The players union however would prefer a soft salary cap similar to the salary cap currently in place. The disagreement over hard salary cap versus soft is of the least importance in my opinion. Either way, the fact that the salary cap will likely remain in the millions suggests that team owners, players, and the NBA should all be thankful that it can continue to pay lavish salaries while the rest of the United States are content with making less than six figures annually with hardly any time off from work. The decision on what players should be paid should be left to the owners, the players, and the players attorneys to decide. If some players can't accept it, there are lots of lower paid athletes who will.

Increasing Revenue Sharing for Team Owners



New Contract Terms

There is a debate over the length of new contracts and the age in which individuals should be allowed to enter the NBA. Once again, this is the least of their worries. If an 18 year old has proven his ability to play at a professional level, no one has the right to tell him that he cannot enter the draft. This may work for the NFL but it is a matter of time before this is debated there as well. Also, the length of a player's contract should be left up to the owners and the player's representative. After all is this not the reason why players hire agents and attorneys? If the union could accomplish this better than they could, why are players even paying attorneys?

In the end a lot of the issues being debated amongst the players, team owners, and the NBA are being discussed in the wrong forum. The NBA allowed the union to create too much player influence, and not enough sound business influences. The NBA in its entirety is after all a business. If there were no NBA, where would the players be right now? Where would the owners be right now? Where would the union be right now? So the overall goal should be saving the NBA, giving the fans what they pay for, and preserving the competitive advantage of the NBA amongst other basketball leagues abroad. There are already players entering into contracts with foreign teams, and if this lockout continues, larger numbers are sure to follow. So team owners should be allowed to control their own teams, and players should understand that there are others in the United States who have suffered pay cuts, but found a way to persevere, and surely they can do the same.

Reference:
ESPN (2011). Retrieved on August 8, 2011 from: http://espn.go.com/nba/topics/_/page/nba-labor-negotiations.


-Kerriann E. Sheppard

Does raising the Debt Ceiling Help Our Economy?

Now that President Obama has achieved an increase in the debt ceiling, can the citizens of the United States expect to see our economy get better? The answer is NO! The United States have a history of spending more money that it receives in revenue, and this is the main problem with our government. By raising the debt ceiling, we just allowed the government to continue borrowing the money that it "needs," but this only raises our deficit even more.

I analogize this issue with credit card debt, something that many Americans can relate to. Lets say that an individual has an American Express card with a credit limit of $5,000. Now lets say that this individual has used the maximum amount of $5,000 and is only able to pay the minimum payment every month of $100. But after making the minimum payment, the individual finds a way to use the available credit every time. As a result, the debt is never reduced, it is only sustained. Now lets say that this individual wishes to increase their credit limit so that they may borrow more money, but they are already living above their means and has more debt than income. Would it be wise for a credit card company to increase their limit based on their history of payments and debt to income ratio? A wise credit card company would refuse to increase their limit until the individual has proven that they can afford to pay a substantial amount of the credit already used on a consistent basis. The United States government, however, treats its credit as if it was owned an American Express "Black Card" with no limitations. Every time it reaches the debt ceiling and cannot raise the revenue to reduce it, it simply increases its credit limit. Don't we all wish we could do this? If it continues to have the ability to increase its debt ceiling, what incentive does it have to pay back its debt? It could simply continue to raise its limit, and make the minimum payment. So in reality, it is only sustaining its debt, not reducing its debt.

There have been suggesting made that the government needs to make some cuts on governmental agencies and spending, but have yet to be done. Some also suggest that the government raise taxes in an effort to generate revenue (the feasibility of these measures will be discussed in another segment). However, no such measures have been taken, and I am not surprised. What incentive is there to do so when the debt ceiling has been raised and it has the ability to raise it again so that it can continue to borrow the funds that it "needs". I wonder how long it is going to take the creditors before they stop lending money to the United States? How long will it take before they refuse to invest in our bonds and securities and take their money elsewhere?

There is great concern about our AAA credit rating declining, and I fear that it will soon become a reality. No responsible borrower operates the way that the US government has operated over the past presidential terms. Individuals are often cautioned not to live above their means, and I think that it is time the US government receives the same caution. It is time to make some serious cuts and focus on increasing revenue. Raising the debt ceiling did nothing more than prove that the United States government holds a "Black Card" with no credit limit, but it has yet to prove that it is a responsible borrower.

Is our Economy now in a better position? Maybe, but I highly doubt that we will make any progress until our government starts proving that it understands the words "deficit" and "budget." We will always have the former if we do not know how to accomplish the latter.

-Kerriann E. Sheppard (Law Offices of Sheppard & Associates)