Do You Really Need More Information?

By Gaute Solheim, Senior Tax Advisor, Norwegian Tax Administration

(Mr. Solheim writes in his individual capacity and does not purport to represent the views of the Norwegian Tax Administration.)

In a previous post, I explained with reference to the Cui 2017 paper on Third Party Information Reporting (TPIR) why I expect good quality TPIR, based on a primitive analysis of the human factor in corporate filings. When I started rereading Cui’s paper, I only read a few lines before a chapter heading from the CIA textbook “The Psychology of Intelligence Analysis” popped into my mind: Do you really need more information? That book contains a full chapter (starting on page 51) on how more information sometimes contributed nothing to the quality of the analysis, but was of immense help for the confidence of the analyst.

I will below make my argument for why the answer should be “yes” when it concerns the TPIR data mentioned by Cui in the paper, but it is a qualified yes. TPIR is a bit like cooking. Fantastic raw materials will not end up as gourmet meals on their own. You need a talented and skilled chef and a kitchen with the right tools, as well.

Having spent some time on capacity-building with less developed tax administrations than the Norwegian, I agree with Cui that establishing a TPIR machinery should not be the first priority in these countries. However, TPIR being the wrong starting point for some developing countries is not an argument for abstaining from it in Norway and other jurisdictions with better-resourced administrations. I will below state my case for why I find TPIR useful based on my observations working for the Norwegian Tax Administration (NTA) (which may of course differ from the opinions of the NTA itself). Continue reading “Do You Really Need More Information?”

The Human Factor in TPIR Filing

By Gaute Solheim, Senior Tax Advisor, Norwegian Tax Administration

(Mr. Solheim writes in his individual capacity and does not purport to represent the views of the Norwegian Tax Administration.)

I happened to reread a paper by Wei Cui from 2017 on Third Party Information Reporting (TPIR) some weeks ago. Based on my own practical experience working for the Norwegian Tax Administration, I found it hard to agree with him on uselessness of TPIR. In this post, I will explain why I expect good quality in TPIR filing. I plan to write a later post on why TPIR is useful.

I will start with crediting Cui for outlining very well what I will call “the story of the corporate tax revenue collection machine.” He does a good job describing how the government has outsourced the bulk of the revenue collection to corporations. I would love to see papers adding empirical numbers to this description. My Norwegian perspective is a world of VAT, corporations withholding taxes on wages and delivering massive amounts of data used to prepopulate the personal tax filings. The way Cui describe the role of the corporations in the “tax revenue collection machine” is probably even more spot on for me than for a reader with a US perspective.

As I read Cui, he expect legal entities to cooperate sufficiently to ensure fairly good quality TPIR. He does some reasoning on why this is to be expected, but I did not find his arguments very convincing. This may be because for some years I have had a different line of reasoning ending with the same conclusion. What follows is based on material I used in a talk some ten years ago for my colleagues at the Large Taxpayer Office in Norway. The theme of that talk was why we found less evasion in our segment of taxpayers than what other tax auditors found when auditing smaller entities. I called the talk “The Human Factor in Tax Filing”. I believe the reasoning I used there also may explain high quality TPIR. Continue reading “The Human Factor in TPIR Filing”

Lead us not into temptation

By Gaute Solheim, Senior Tax Advisor, Norwegian Tax Administration

(Mr. Solheim writes in his individual capacity and does not purport to represent the views of the Norwegian Tax Administration.)

The Norwegian Tax Administration (NTA) has succeeded in leading most of the taxpayers away from the temptation of tax evasion over the last two decades. Not all, but most. It was not by carefully guiding them down a narrow path. The NTA constructed a wide avenue built on large quantities of third-party information pushed into prepopulated tax filings. Norway tweaked details in the rules for the most used deductions, linking them to easy observable facts and standard rates instead of using actual cost. Feedback from audits were used to evaluate possible changes in rules, eliminating or reducing the temptations facing the taxpayer in the filing process.

After all this work, we still had a problem with taxpayers being formally non-compliant by not logging into the digital portal and clicking the button for submitting their prepopulated tax filing. The easy fix was to change the law. A taxpayer receiving the digital and prepopulated tax report would be deemed to accept it as his filing if he stayed passive. Presto, even more compliant taxpayers.

But, at least for internal use, the NTA retained the old division of taxpayers into those who want to comply and those who want to evade. The faithful and the sinners. What people want is hard to observe, and it is hard to design measures to influence what people want. The NTA kept it despite its actions being focused very much on making it irrelevant whether the taxpayer wanted this or that. Spending all my time auditing MNEs, I found it really hard to figure out the wants of a corporation. Continue reading “Lead us not into temptation”

More on the College Admissions Scandal

By Sam Brunson

On Wednesday, I posted about how tax law played a central role in the college admissions scandal. As I’ve read through a little more of the affidavit, I decided to highlight two additional detail in this whole scandal, details that suggest that, for at least some of the participants, the tax consequences were very important.

Bruce Isackson and Facebook Stock

Bruce Isackson is the president of WP Investments, a real estate investment and development fund.[fn1] According to the affidavit, he used the fake athlete thing (soccer for the older daughter, rowing for the younger) to get two daughters into USC. He seems to have also paid for his younger daughter to get a better ACT score.

What’s interesting for purposes of this post is how he paid. Continue reading “More on the College Admissions Scandal”

The Trump Foundation and the Private Foundation Termination Tax

By Ellen P. Aprill

Michael Cohen’s accusations against President Trump in his statement before the House Committee on Oversight and Reform yesterday include arranging for a straw bidder to purchase a portrait of President Trump at an auction, using Trump Foundation funds to repay the fake bidder, and keeping the art for himself.  As part of the New York Attorney General’s  stipulation agreement with The Trump Foundation, the foundation must sell two other Trump portraits it currently owns. 

This stipulation agreement with the New York Attorney General has saved the Trump Foundation from a burdensome penalty tax in connection with the involuntary termination.  As had been widely reported at the end of last year, the New York Attorney General announced on December 18 that its investigation had found “a shocking pattern of illegality involving the Trump Foundation – including unlawful coordination with the Trump presidential campaign, repeated and willful self-dealing, and much more.”  Under the stipulation agreement, the Trump Foundation will dissolve and submit to the court a list of non-for-profit organizations to receive the Foundation’s remaining assets.  The Attorney General and the state court will need to approve the organizations that receive the Trump Foundation’s funds. Continue reading “The Trump Foundation and the Private Foundation Termination Tax”

TIGTA’s Report on the Growing Gig Economy

By: Joseph C. Dugan, Trial Attorney, Department of Justice, Civil Division

On February 14, 2019, the Treasury Inspector General for Tax Administration (TIGTA) released a Valentine’s Day treat: a comprehensive report following a TIGTA audit concerning self-employment tax compliance by taxpayers in the emerging “gig economy.”

As Forbes noted last year, over one-third of American workers participate in the gig economy, doing freelance or part-time work to supplement their regular incomes or stringing together a series of “gigs” to displace traditional employment.  Popular gig services include ride-sharing giants Uber and Lyft; arts-and-crafts hub Etsy; food delivery services GrubHub and Postmates; and domestic support networks Care.com and TaskRabbit.  Even Amazon.com, the second-largest retailer in the world and a traditional employer to many thousands of workers in Seattle and at Amazon distribution centers worldwide, has gotten in on the gig economy with its Amazon Flex service.  And for those interested in more professional work experience to pad their resumes, Fiverr connects businesses with freelance copywriters, marketers, and graphic designers.  The power of smartphones and social media, coupled with flat wage growth in recent years, makes the digital side hustle appealing and, for many households, necessary.

From a tax revenue perspective, the gig economy is great:  it is creating billions of dollars of additional wealth and helping to replenish government coffers that the so-called Tax Cuts and Jobs Act (TCJA) has left a little emptier than usual.  From a tax compliance perspective, however, the gig economy presents new challenges.  Gig payers generally treat their workers as independent contractors, which means that the payers do not withhold income tax and do not pay the employer portion of FICA.  Instead, the contractor is required to remit quarterly estimated income tax payments to the IRS and to pay the regressive self-employment tax, which works out to 15.3% on the first $128,400 in net earnings during TY2018, and 2.9% to 3.8% on additional net earnings.  That self-employment tax applies even for low-income freelancers (i.e., it cannot be canceled out by the standard deduction or nonrefundable credits). Continue reading “TIGTA’s Report on the Growing Gig Economy”

New Paper on Tax Enforcement and Corporate Malfeasance

By: Leandra Lederman

I just finished drafting a paper that got me reading a lot about corporate fraud. I find fraud fascinating, so this was a bit of a treat! The new paper is Information Matters in Tax Enforcement, and it’s co-authored with my former student Joe Dugan (JD ’15), who is an attorney at DOJ (but did not write in his official capacity). We recently posted the article on SSRN (here), and will soon be looking for a home for it.

This article was prompted by Professor Wei Cui’s publication of Taxation Without Information: The Institutional Foundations of Modern Tax Collection, 20 U. Pa. J. Bus. L. 93 (2018). Cui sets forth the contrarian thesis that “modern governments can practice ‘taxation without information.’” His argument rests on two premises: (1) “giving governments effective access to taxpayer information through third parties does not explain the success of modern tax administration”; and (2) modern tax administration succeeds because business firms are pro-social, fostering compliance. Professor Daniel Hemel favorably reviewed Cui’s article on TaxProf blog.

Cui particularly takes issue with Henrik J. Kleven et al., Why Can Modern Governments Tax So Much? An Agency Model of Firms as Fiscal Intermediaries, 83 Economica 219 (2016), and Dina Pomeranz, No Taxation Without Information: Deterrence and Self-Enforcement in the Value Added Tax, 105 Am. Econ. Rev. 2539 (2015), both of which show the importance of third-party information reporting to tax enforcement. Cui’s article also criticizes Leandra Lederman, Reducing Information Gaps to Reduce the Tax Gap: When Is Information Reporting Warranted?, 78 Fordham L. Rev. 1733 (2010), which argued that information reporting is useful but not a panacea, and set forth six factors to evaluate the likely effectiveness of proposed information-reporting requirements.

Information Matters in Tax Enforcement takes on both of Cui’s arguments, as well as his subsidiary claim that the value-added tax (VAT) does not involve third-party reporting or reporting of individual transactions. Joe and I marshal a lot of evidence to show (1) third-party information reporting is generally very effective, and (2) firms are not inherently pro-social. Rather, the literature supports Kleven et al.’s argument that numerosity increases compliance. That is, where more people would have to collude, cheating is less likely due to the increased risk of defection. The fact that large firms generally are more tax compliant than small ones—a point Cui concedes—is consistent with that. Large firms are also subject to more regulation and oversight, which produce reliable information flows from the firm to the government. Joe and I also show that VATs do involve third-party reporting, with the modern trend being digital real-time reporting. Continue reading “New Paper on Tax Enforcement and Corporate Malfeasance”

Section 199A’s Workplace Shift

By Diane Ring

As we mark the one year anniversary of tax reform, the aftermath continues to dominate tax policy analysis. New § 199A, which my co-author, Shu-Yi Oei, and I initially explored here and here and here, continues to attract significant attention, both in terms of the provision’s likely substantive effects, and the legislative, regulatory, and political issues it raises.

One of the most compelling, yet underanalyzed, questions is how § 199A could impact labor and dramatically reshape work, the workforce, and the workplace. In a new paper posted on SSRN on December 3, titled “Tax Law’s Workplace Shift,“ Shu-Yi and I tackle these issues in detail. In brief, the paper explores the factors that will determine whether § 199A is likely to cause a workplace shift from employee to independent contractor arrangements, and, if it does, how such a shift should be normatively evaluated. Ultimately, we show how our evaluation of these § 199A workplace effects must depend on the types of workers and work at issue. Continue reading “Section 199A’s Workplace Shift”

Tax Evasion and the Fraud Diamond

By: Leandra LedermanFraud Diamond image

There is an extensive set of literatures on tax compliance and evasion, often discussing the traditional economic model (the deterrence model) and/or behavioral theories such as social norms or tax morale. (For recent examples summarizing the theories, see this article by Kathleen Delaney Thomas, this one by Adam Thimmesch, or this one by yours truly.) There is also a separate accounting literature on fraud.

A key concept in this accounting literature is the “Fraud Triangle.” Yet despite the important role this theory plays within the accounting literature, the Fraud Triangle does not seem to have permeated the tax compliance literature, particularly the relevant legal literature.

For example, a search in “Secondary Materials” in Lexis for “‘fraud triangle’ w/50 tax!” turns up only one article, which is not a tax article but does cite a 2006 Tax Notes article authored by three CPAs. That article is James A. Tackett et al., “A Criminological Perspective of Tax Evasion” (paywalled). Yet, the Fraud Triangle should not be overlooked by scholars outside of accounting. It provides a powerful tool with which to conceptualize tax evasion. And, as discussed below, it helps provide a framework that both supports the deterrence model and allows other factors to coexist with deterrence.

The Fraud Triangle and the Fraud Diamond

The Fraud Triangle derives from three factors that criminologist Donald R. Cressey originally identified in a 1951 article in the Journal of Accountancy, “Why Do Trusted Persons Commit Fraud?: A Social-Psychological Study of Defalcators.” As discussed in his 1951 article and his 1953 book, “Other People’s Money: A Study in the Social Psychology of Embezzlement,” Cressey developed the factors that became the Fraud Triangle out of in-depth interviews with inmates who had been convicted of trust violations such as embezzlement. The three factors were labelled the “fraud triangle” by Steve Albrecht in the early 1990s. The elements of the Fraud Triangle, as discussed by Albrecht and others, are “perceived pressure” (usually financial), “perceived opportunity” to commit the fraud, and “rationalization” that the actions are justifiable or appropriate in the context of the situation. Albrecht and his coauthors of a 1979 KPMG study of convicted perpetrators of fraud “found that the decision to commit fraud is determined by the interaction of all three forces.” Continue reading “Tax Evasion and the Fraud Diamond”

Coming Soon: Trump’s Tax Returns (or Maybe Not)

By Sam Brunson

As we’re all acutely aware, in his presidential campaign, Donald Trump flouted decades of history by refusing to release his tax returns. And given that (a) the history was based on norms, not law, and (b) the Republican-controlled Congress did nothing to enforce the norms (or transform them into law), he continued to flout that norm throughout the first two years of his presidency.

But on January 3, 2019, Democrats will gain control of the House. And Democratic Representatives have made pretty clear that one of their first agenda items will be to request Trump’s tax returns. So does that mean we’ll finally get access to his tax returns?

Maybe. (But probably not.) Continue reading “Coming Soon: Trump’s Tax Returns (or Maybe Not)”