How The Wealthy Deal With Their IRS Debt Problems
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Going After Big Money Individuals
Pro Public called them SEAL Team 6 – the IRS special force assembled to audit the ultra-wealthy. Their story started in 2009 when the IRS assembled the elite of their elite investigators to form a special unit to identify and unravel and ultimately understand the ultra-sophisticated tax dodges employed by the super-rich.
As material inequality soared wealth became increasingly concentrated into the hands of fewer people, hence the tax maneuvers employed by these titans became so sophisticated and complex that no other approach stood a chance: bring in the big guns or not at all.
President Trump’s IRS commissioner, Charles Rettig, while he was still a highly respected tax lawyer, had no qualms about calling the audits performed by this elite group, an audit from hell. At the time, it was the IRS’s point of view at the time that drastic measures were needed in order to prevent very large scale losses for the Treasury if the dodging trend could not be stemmed.
Big Money Individuals are those individuals and families which fall into the famed one-percenter group. The individual one-percenter share one characteristic: their personal income tax shows a closer resemblance to those of a multinational corporation than to those of any individual as we understand the term.
What Is at Stake?
The logic was, of course, to bring the high-skill individuals in the employment of the IRS who routinely deal with the complexities of the multinational corporations, into this new specialist team. The rationale was put this way by Doug Shulman, erstwhile chief of the IRS (paraphrased) – ‘To tax the wealthy well, not only because that is where the money is, but because that is where the cheating is.’
Studies confirm what we know intuitively: the more money you have, and the more taxes you will be required to pay, the more motivated you become to get away with paying less than your due. The top ½ % of income earners account for 20% of all underreported taxes. Put differently, that amounts to $50 billion per year.
Despite the IRS reputation as a ferocious agency that takes no prisoners and against whom “no-one” had a chance, the ultra-wealthy ended up being a very large exception to this rule. Even the IRS found it very, very hard to go heads on with the really rich.
What Happens, Even To The IRS, When They Meet Their Match?
Many reasons have been offered for the IRS flat-out failure in taking on big money, all of them true to some extent. First off, Big Money, as the name implies, has limitless money. When Big Money goes into the ring against the elite of the elite of the IRS, they come in running with their elite of the elite team of the world’s best legal and accounting minds. And these Big Money Advisors are very, very smart and never cross the line, or the letter of the law. They rather construct ultra-complex and super-refined strategies that stretches the tax code rather than breaking it – hence they create plausible grey-areas where they can really save billions for their clients.
By stacking the odds in terms of the severity of structured detail, they force the IRS into a game that takes years and years, at least. And time is money – for a Federal Agency with a shrinking budget while time is money, in the opposite sense of the word, for those who are in effect on a grey-area tax holiday. While the IRS spends years to figure out just what is going on, Big Money just grows and grows.
And to crown their almost sovereign ability to “grey-line” their own tax practices, they have an unending ability to place obstacles in the wake of every move the IRS makes. Lawyers, and more lawyers – they bring more lawyers and better lawyers – and accountants and consultants into the field than the IRS can, and simply outgun the government’s best efforts, and there is no end in sight: the IRS simply do not have a solution to the logistics of the game.
The playing field is simply not level: take for example, the privacy rule. When an IRS tax team member divulges any taxpayer information, they are liable for prison-time, something that Big Money will undoubtedly achieve if they were publically disadvantaged. As a consequence, almost none of the millions and millions of documents that form the narrative between the Elite IRS team and Big Money, is publically available. It is a hushed aspect of law-enforcement and the odds of soliciting an attorney that will actually talk about his Big Money client’s tax structures are almost zero. What is more, almost all of these Big Money disputes the IRS develops, end up in settlements out of court, usually sealed to keep everyone’s affairs under wraps.
It is possible to reconstruct the typical strategy deployed by Big Money when the Elite IRS team comes knocking. The strategy starts long before the IRS become involved.
Long before any taxes have to be filed, Big Money gathers a team of Big Brains to construct a strategic tax structure that can only be understood by a handful of the world’s leading experts. These structure are always disruptive: the Big Brains behind it more often than not realize that the government will challenge it and that this will just add more and more rounds in court with which they can basically batter the IRS into silence.
As soon as the IRS fires the first shots in an audit from hell, Big Money is like an oiled machine and teams of Big Brain Professionals are deployed for battles on every front they can think of.
- Deny that any money is owed
- Argue that Elite Investigators of IRS misunderstand the tax issues completely
- Complain to top officials at the IRS in an unending barrage
- Challenge every document request by the IRS in court
- Stall the process in every conceivable manner
- Team up and form a Big Money lobby.
- Send countless of these ultra-high paid lobbyists with unlimited resources to the Hill to pull the teeth of the tiger and weaken the Elite Team’s ability to take on Big Money.
- Undoubtedly motivated by these lobbyists Members of Congress slashed the Agency’s budget, removing many of the resources required by the Elite Team to take on Big Money.
- Due to severe cuts in Agency resources, literally thousands of IRS employees left the service, with an inordinate number of the elite investigators amongst them.
- In this manner, Big Money broke the IRS team of 242 Elite Team Investigators (2012) up, leaving them with only a diluted team of 96 demotivated members by 2014.
- At the end of 2018, the team dwindled to only 58 members.
- In 2010 the IRS audited 32,000 millionaires
- By 2018, this number has fallen to only 16,000 millionaire audits
- Audits of the ultrawealthy is down 52% since 2011
According to insiders from the IRS, “from the minute it went live, it was dead.” Records show that the IRS never wins; Big Money is almost always victorious.
And The Medium Money Community Came Together Too
In a fervor of aggression, the IRS went after Medium and Small Money too. All individuals who made more than $!0 million per year, were presented with typical tactics used by Big Money: barrages of requests for details of financial affairs, no longer covering two pages of details, but often consisting of dozens and dozens of pages.
This brought the IRS into a confrontation with Tax Practitioners who called them out: these practices were high handed and intrusive, they said and they went directly to the IRS too. In private meetings this profession stood up and raised their concerns during private meetings with the IRS. Under the banner of the 1990’s Tax Bill of Rights, the IRS has to approach taxpayers in a manner reminiscent more of Customer Service than those of Government Enforcement. Under Congressional Scrutiny, IRS officials are forced into meeting with ‘the enemy’ – top tax lawyers and accountants, to address their concerns.
Some of The Schemes The Uber-Wealthy Get Away With
Americans are a divided nation we hear every day, but the greatest unifier in the nation is the dread everyone feels when they deal with the IRS. When it comes to the IRS, no news is really good news. It is no wonder then that the public does not really get worked up too much when some or other rich billionaire gets away without paying taxes. Hearing about the titans living a tax free life is very abstract and no doubt it has to be incredibly boring to listen to how these people operate. For once, however, you’d be wrong. Tax dodging can be very entertaining.
One of the greatest examples of the creative way these dodgers operate, came to the surface when “IRS Seal team 6” started delving deep into the complexities of the tax structures of the Schaeffler Group. Without having to go too deep into the specifics of the structure, it became apparent that the Schaeffler Group had a windfall of $5 billion dollars which they essentially made tax free.
Here’s how it’s done. Suppose you borrowed $11 Billion form the banks and suppose, when you told them you were having problems repaying them, they kindly told you that they forgive half of the amount. You end up repaying only $5.5 billion, and you pocket $5.5 billion tax free. Right?, Wrong.
That is in essence what the IRS uncovered when they really started combing through the Schaeffler Group’s tax structures. Forgiven debt can be a very lucrative revenue stream, it seems.
Under American law however, companies and individuals are liable for taxes on any forgiven part of a loan. For those who think this is a bit harsh, think of it this way: imagine a scenario where your company no longer pay you a salary. They rather just offer you loans at low interest and then, if you do not pay it back they forgive your loans and you end up with a tax free life living on your unpaid company loans. That clearly won’t do.
When you are part of the 0.1 percenters however, things are not so readily clear. Using these brilliant minds at their beck and call the Schaeffer Group used multiple instruments and layer upon layer of complex instruments all “with moving parts” and so on.
The deal was ingenious, naturally. The structure was rigged around a refinancing agreement between the banks and the Schaeffer Group. The $ 11 billion was split into two: a loan for $ 7 billion and another loan for $5 billion. The $7 billion was designated the senior loan that had to be paid back first and the $5 billion was the junior loan to be paid back later. Schaeffer’s assets that produced income were all placed into the entity that owed the $7 billion. A payment schedule and a reasonable interest rate of about 4.25% established the $7 billion loan’s credentials.
The entity that owed the $5 billion loan, had no income generating assets at all and there was no repayment schedule. The interest rate was negligible at approximately 0.1% as well as a further 7% per year that Schaeffer could defer to the end of the loan term. Coupled with these “terms” some contingent instruments were added which required Schaeffer to make payments to the future performance of the company.
These contingent instruments implied to the IRS that the loan was in fact replaced by future payments to the performance of the company, if any – and this meant that the banks might or might never get any return at all. According to the IRS this resulted in an effective cancellation of the loan for all practical purposes in return for equity in the firm. This was loan forgiveness if the IRS ever saw it.
The deal was so complex that no clear line was visible between the banks and the borrower, and to crown it all, the loan, in this case the 5 billion dollar loan, was patently never explicitly forgiven. So the bank and the lender could just deny that any loan forgiveness took place.
While the banks and the Schaeffer Group maintained that no loan forgiveness took place, the IRS was left in the lurch trying to unravel the almost impossible complexities of the structure used to house the transaction.
After six years the Schaeffer Group defeated the IRS by using the obstructionists strategies discussed in this article. A tired and defeated IRS gave up, and settled the case with Schaeffer for what inside sources say was tens of millions of dollars. Not bad for a premium on a $5 billion income.
At The End of The Day?
After severe defeats in taking on Big Money – like the Schaeffler Group – and losing badly, the IRS ended up frustrated and demotivated. Despite this, the number of so-called Global High Wealth Audits are slowly increasing in number. During 2018 the IRS conducted 149 of these audits, but Tax Lawyers say these numbers are misleading. The IRS scaled down its audits. The audits are shorter in duration and much smaller in scope.
Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intends for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. This article cannot serve as a substitute for such professional services or advice. Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation. This article is subject to change at any time and for any reason.
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