IRS Should Be Targeting The Wealthy Taxpayers Through The Use Of The Whistleblower Program.

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The IRS spends about 4 cents per dollar collected by utilizing the IRS whistleblower program, and about 10 cents per dollar collected by using its traditional audit methods.  The lower costs should mandate that the IRS start prioritizing whistleblower claims and encourage them to shorten the time processing those claims.  Both of these steps would help the IRS to better attack the tax gap, hopefully negate the need to target the poor and stem the tide of wealthy sophisticated taxpayers cheating the system. 

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Recent Developments

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This blog will attempt to re-cap the following newsworthy stories:

  1. Transfer Pricing Backlash?
  2. Amazon v. IRS

Transfer Pricing Backlash?

As Previously discussed in this Blog, United States Multi-National Corporations (USMNCs) have been using transfer pricing to stash profits overseas and to avoid U.S. and State taxation.

Recently, one state treasurer is attempting to fight against the USMNCs.  In his April Newsletter, Illinois State Treasurer Michael Frerichs advocates for accountability for USMNCs that interact with his office.  Mr. Frerichs states that he is in the process of sponsoring a bill in the Illinois legislature that would prohibit companies from doing business with Illinois if it utilizes offshore accounts to avoid paying taxes.

Mr. Frerichs proposal raises several questions including:

  1. Are more states willing to undertake such measures to ensure that USMNCs pay their fair share?
  2. Is Illinois willing to enforce this law against companies that are based in Illinois and notorious for using foreign subsidiaries and accounts to hide profits from taxation?
  3. Why isn't the federal government utilizing this method to ensure better compliance by the USMNCs?
  4. Will this matte if the US lowers the corporate tax rate to permit USMNCs to bring back the amounts stashed offshore at a reduced rate?

While the answers to these questions are mere conjecture at this point, given the fact that the proposed law has not been passed to ensure compliance by USMNCs doing business with Illinois, it is still refreshing and a welcomed change of pace to the usual rhetoric of allowing USMNCs to continue to stash taxable income offshore.

Amazon v. IRS

In a recent Tax Court opinion (Amazon.com, Inc. v. Commissioner of Internal Revenue, 148 T.C. No. 8 (2017)), the Tax Court held that IRS overstepped its authority in applying a discounted cash flow method to value a cost sharing arrangement between Amazon and its subsidiaries.

This cash involved whether Amazon properly valued an intangible it sold to its offshore subsidiary. The IRS felt that Amazon did not properly value the intangible and sought to apply the discounted cash method to value the intangible.  Why did the IRS take this approach? Simple, because it meant that Amazon would have had to recognize more income from the sale of intangible in the US and therefore would also have had to pay more taxes.

Amazon disagreed with the IRS. Amazon stated that the IRS' method violated established precedent in Veritas Software v. Commissioner, 133 T.C. No. 14 (2009).  In Veritas, the issue before the Court was the proper buy in the subsidiary was required to pay as a result of a cost sharing arrangement.  In Veritas, the Court held that comparable uncontrolled transaction (CUT) was the proper valuation method.  Similar to Veritas, Amazon stated that the proper method utilized in its case should have been the CUT method.

The Court held in favor of Amazon.  See this synopsis of the case through the Journal of Accountancy.